Business Working Capital and Merchant Cash Advances Explained

Working capital is the money a business uses to run day to day: payroll, inventory, rent, marketing, and covering the gap between paying suppliers and getting paid by customers. When cash runs short, owners look at several kinds of funding. One of the most common, and most misunderstood, is the merchant cash advance, or MCA. This guide explains how it works, what it costs, and how to decide if it fits.

What a merchant cash advance is

An MCA is not a traditional loan. A provider advances a lump sum of cash in exchange for a portion of the business's future receipts. The business then repays the advance, plus a fee, by giving up a percentage of daily or weekly sales, or by making fixed daily or weekly payments, until the agreed total is paid.

Because repayment tracks income in some structures, and because approval leans on bank statements and revenue instead of only credit, MCAs are often available to businesses that would not qualify for a bank loan. Our working capital programs typically look at deposits in your bank statements, generally $5,000 to $10,000 or more per month, with approvals case by case, and funds can arrive in about 24 to 48 hours once approved.

How the cost is calculated

MCAs are priced with a factor rate, not an interest rate. A factor rate is a multiplier, such as 1.3. If you receive $10,000 with a factor of 1.3, you repay $13,000. The fee is $3,000. How costly that is depends on how fast you repay. Repaying $13,000 over four months is a much higher annual cost than over twelve months, even though the dollar fee is the same.

Because of this, the annualized cost of an MCA is usually higher than a bank term loan or a line of credit. That is the trade-off for speed and easier approval, and it is why you should understand the full cost before you sign.

When working capital funding can make sense

• A short-term cash gap with a clear source of repayment, such as seasonal inventory before a busy period
• An opportunity with a fast return, such as a bulk purchase at a discount
• A business that cannot yet qualify for a bank loan but has steady deposits
• An urgent need where the time saved is worth the higher cost

When to be careful

• If the business is already struggling to cover its current obligations, more daily payments can make cash flow tighter
• If you plan to use the money for a long-term investment, a term loan is often a better match than a short repayment period
• If you already have other advances, stacking them can create heavy daily payment burdens

Questions to ask before you sign

1. What is the total amount I will repay, and what is the factor rate?
2. How are payments taken: a percentage of sales or a fixed amount, and how often?
3. What is the estimated repayment period?
4. Are there fees for origination, processing, or early payoff, and is there any discount for paying early?
5. Is there a personal guarantee, and what does it cover?
6. What happens if sales slow down?

Ask for the terms in writing and read them carefully. If the answers are unclear, get help before you commit.

Other ways to fund working capital

Depending on your credit and revenue, other options may cost less: a business term loan, a line of credit, equipment financing when the need is equipment, or a business credit card for ongoing purchases. Business funding programs generally look for a credit score of at least 550. Loans and working capital often qualify with a 680 or higher score, or through revenue instead of credit. We help compare these options and match them to how your business actually runs.

Rates, terms, and approval depend on the business and the funding provider. This guide is educational and is not a commitment to fund.