Merchant Cash Advance vs Business Loan: Which Funding Is Right for Your Business?
Quick take: Merchant Cash Advances (MCAs) give you fast access to working capital and are repaid from future sales, while traditional business loans provide structured repayment with potentially lower total cost. The best option depends on your sales consistency, timeline, and goals.
What Is a Merchant Cash Advance (MCA)?
An MCA is an advance on your future receivables. You receive a lump sum up front and repay it automatically from a fixed percentage of your daily credit/debit card sales or bank deposits until the agreed payback amount (the “factor amount”) is satisfied.
Key MCA Concepts
- Advance Amount: The lump sum you receive (e.g., $50,000).
- Factor Rate: A multiplier (e.g., 1.35). Your total payback = advance × factor (50,000 × 1.35 = $67,500).
- Holdback (Remittance) %: The % of daily sales remitted (e.g., 10% of daily card receipts).
- Flexible Daily Repayment: If sales dip, the dollar remitted dips; if sales rise, repayment speeds up.
Pros of an MCA
- Speed: Funds can arrive in 24–72 hours once approved.
- Lower credit barrier: Underwriting emphasizes revenue consistency more than credit score.
- Sales-based repayment: Payments flex with your sales volume.
Cons of an MCA
- Higher cost: Factor rates often make total payback higher than loan interest.
- Daily/weekly remittances: Can tighten cash flow.
- Short terms: Typically 3–12 months, sometimes up to ~18 months.
What Is a Business Loan?
A business loan provides a lump sum with a set repayment schedule (monthly or weekly). You’re quoted an interest rate or APR, a term length, and a fixed payment. Common types include bank term loans, SBA loans, and online term loans.
Pros of a Business Loan
- Potentially lower cost: Especially through banks/SBA.
- Predictable payments: Fixed schedule simplifies budgeting.
- Longer terms: Reduce payment size and total cash-flow strain.
Cons of a Business Loan
- More documentation: Financials, tax returns, bank statements, etc.
- Slower funding: Underwriting may take days to weeks.
- Higher credit bar (often): Stronger credit and time-in-business usually required for best rates.
Cost Comparison: MCA vs Business Loan
MCA Example
Advance: $50,000
Factor: 1.35 → Total payback: $67,500
If repaid over ~9 months via daily sales remittances, the effective cost can equate to a very high APR (because factor rates aren’t interest). The real cost depends on how quickly you repay.
Loan Example
Loan: $50,000 at 12% APR for 36 months
Estimated monthly payment ≈ $1,660 (illustrative).
Total interest ≈ $9,760 (illustrative). Lower total cost than the MCA example, but slower to obtain and more documentation required.
Underwriting Snapshot
| Criteria | Typical MCA | Typical Business Loan |
|---|---|---|
| Time in Business | 3–6+ months | 12–24+ months (SBA/banks often prefer 2+ years) |
| Revenue | $10k–$20k+/mo (consistent deposits) | Varies; stronger revenue/history preferred |
| Credit | Often 550–600+ accepted | Usually 650–700+ for best rates |
| Funding Speed | Fast: 24–72 hours after approval | Slower: days to weeks |
| Repayment | Daily/weekly % of sales or fixed ACH | Fixed weekly/monthly payment |
| Total Cost | Higher (factor rate) | Lower (interest/APR) |
When an MCA Can Make Sense
- You need funds fast for inventory, urgent repairs, or a short-term opportunity.
- Credit score is still rebuilding but sales are strong and consistent.
- Seasonal businesses that prefer payments to rise/fall with sales.
When a Business Loan Can Make Sense
- You want the lowest total cost and can wait longer for approval/funding.
- Predictable payments help you plan and budget.
- Longer projects (build-outs, expansions) that benefit from longer terms.
How Each Affects Cash Flow
MCA: Payments align with sales, but frequent remittances can feel tight on slower weeks. Factor cost is fixed—you owe the full factor amount regardless of how quickly you repay.
Loan: Fixed payment means predictability; less flexible in a slow week, but often cheaper over time.
Choosing Between Them: A Simple Framework
- Timeline: If you need funds in 24–72 hours, MCA is more realistic; if you can wait, a loan may cost less.
- Cash-flow comfort: Will daily/weekly remittances hurt your operations?
- Total cost vs flexibility: Is flexibility worth paying more?
- Use of funds: Short-term working capital vs long-term projects.
- Credit & documentation: Be honest about what you can provide quickly.
Documentation Checklist
MCA (often)
- Last 3–6 months business bank statements
- Driver’s license, voided check
- Basic application and ownership info
Business Loan (often)
- 2 years business tax returns (and sometimes personal)
- Year-to-date financials (P&L and balance sheet)
- Business bank statements (3–6 months)
- Debt schedule, AR/AP aging (sometimes)
- Business plan/Use of proceeds (for some lenders)
Bottom Line
If speed and flexible sales-based repayment matter most—and you accept a higher cost—an MCA can bridge a short-term need. If you can wait and document your business, a traditional loan may provide a lower total cost and more predictable payments. Align the product to your cash-flow patterns and the purpose of funds.
Frequently Asked Questions
Is an MCA a loan?
No. It’s an advance on future receivables with a fixed factor payback, not interest.
How fast can I receive funding?
MCAs: often 24–72 hours after approval. Loans: days to weeks depending on lender/program.
Will an MCA hurt my cash flow?
Remittances occur daily/weekly. They flex with sales, but frequent deductions can feel tight.
Which costs more—an MCA or a loan?
MCAs typically cost more overall. Loans often have lower APR and total cost.
Can I prepay an MCA?
Sometimes, but discounts vary. Read your contract—many require the full factor amount.
What credit score do I need?
MCAs may approve at 550–600+. Competitive loans usually require higher credit and stronger documentation.