Merchant Cash Advance Pros and Cons You Need to Know
When small business owners are facing unexpected expenses and cash flow instability, merchant cash advances (MCAs) can feel like the answer to their problems. After all, MCAs offer quick capital and more relaxed eligibility requirements than other financing options.
Before you jump in, let us guide you through a closer look at merchant cash advance pros and cons. We’ll also share three alternative funding solutions that might be a better fit when you need speed and flexibility.
What Is a Merchant Cash Advance?
A merchant cash advance is a type of business financing where you receive a lump sum of cash based on your anticipated future sales volume. Instead of making monthly or weekly repayments like you would with other lending options, the provider takes a percentage of your daily debit card sales and credit card transactions — also known as a holdback — until they’ve recouped the advance amount plus fees.
The Top Merchant Cash Advance Pros and Cons
Like most financing options, merchant cash advances come with both pros and cons. It’s important to understand all the benefits and downsides so you can make an informed decision for your small business.
The Pros of Merchant Cash Advances
The top advantages of MCAs are:
Quick access to cash
No need to put up collateral
Easier eligibility requirements
Repayments that ebb and flow with revenue
Let’s take a closer look at each one.
Pro #1: Quick Access to Cash
When you’re low on working capital, you need a financing solution that gives you quick access to cash so you can cover your expenses without falling behind. With a merchant cash advance, you can receive funding in a matter of days, instead of the weeks or months it could take for a traditional loan.
Pro #2: No Collateral Required
Having to put up collateral for a loan can be a challenge for small businesses. Either you don’t have the assets available (such as equipment, inventory, or real estate), or you don’t feel comfortable putting the assets you do have in jeopardy. An MCA provider won’t ask for collateral because your future credit card sales will be the source of their repayment, which helps to offset their risk.
Pro #3: Less Stringent Eligibility
It can be difficult to get approved for a loan (or receive favorable terms) when you have bad credit or no credit history at all. However, a merchant cash advance provider may not even run a credit check. If they do, the minimum credit score they accept is often lower than traditional lending options.
The eligibility requirements will often include:
How long you’ve been in business
How much revenue you generate and your monthly credit card sales
A business bank account
Pro #4: Flexible Repayments
With a traditional loan, you make monthly repayments until the balance is paid off, even if business wasn’t good that month. Since an MCA is repaid from debit and credit card transactions, you only owe when money is actually coming in. This might feel like a more comfortable arrangement for businesses with revenue cycles that ebb and flow.
The Cons of Merchant Cash Advances
The top disadvantages of MCAs are:
High lending costs
Low borrowing amounts
A repayment structure that leads to a fluctuating payoff date
The potential to be trapped in a debt cycle
No refinancing with an SBA loan
Consider each one to decide if the downsides are worth the advantages.
Con #1: High Costs
Merchant cash advances are known for their high costs. Instead of charging interest like a lender would, an MCA provider will charge a factor rate. Factor rates are usually between 1.1 and 1.5.
To calculate the total cost of an MCA, multiply the advance amount by the factor rate. For example, if you get an MCA for $50,000 with a factor rate of 1.2, you’ll owe $60,000 ($50,000 x 1.2) to pay it off. If you get a $50,000 advance with a 1.4 factor rate, you’d owe $70,000. That’s a 40% increase!
There may also be fees in addition to the factor rate.
Con #2: Lower Borrowing Amounts
Generally, you won’t be able to borrow as much with a merchant cash advance as you could with other lending options. For starters, the available funding range is usually lower — typically between $5,000 and $500,000. On top of that, your business’s revenue potential will determine where in that range you fall. It might mean you won’t be able to get approved for as much money as you need.
Con #3: Repayment Structure
While flexible repayments were listed above as a pro, there’s also a downside. Since you’re only paying down what you owe when you make debit or credit card sales, it can be hard to predict when the MCA will actually be paid off. If that uncertainty makes you uncomfortable, you may be better off with a short-term business loan.
Con #4: Potential for a Debt Cycle
Those high costs we mentioned earlier could trap you in a debt cycle that’s hard to escape.
While there isn’t a set repayment period, there’s usually an anticipated payoff length of 3-18 months, making it short-term financing. Forfeiting enough of your revenue to repay the advance plus the factor rate in such a short timeframe might put further strain on your cash flow, leading you to borrow more money so you can cover your financial responsibilities.
If you’ve ever read If You Give a Mouse a Cookie, you can probably guess how this story ends.
Con #5: No Refinancing With an SBA Loan
The Small Business Administration (SBA) doesn’t think merchant cash advances are a good idea. As proof, a new rule went into effect in June 2025 that states SBA loans can no longer be used to refinance MCAs or invoice factoring.
The SBA knows the high costs can lead to debt cycles, and it’s not a risk they’re willing to take on.
3 Flexible Alternatives to an MCA
You might like the advantages of an MCA, but the disadvantages are giving you pause. If you’re looking for fast, flexible funding, you have other options. Here are three MCA alternatives to consider instead.
1. Working Capital Loan
If you like that MCAs provide a lump sum upfront and are faster than traditional bank loans, consider a working capital loan instead. With this type of financing, you’ll get the speed and flexibility you’re seeking.
However, you’ll enjoy predictable weekly or monthly payments and a fixed term length — instead of the fluctuations that come with MCA repayments. You may also be able to borrow more than you would with an MCA.
For example, with Backd’s Business Term Loan,* you can get funding of up to $1.5 million and term lengths of up to 24 months.
2. Business Line of Credit
A business line of credit is another fast funding option. It’s a form of revolving credit that you can withdraw from when you need to, making it a great option for covering short-term cash flow gaps or unexpected business needs. It’s like a working capital safety net.
With Backd’s Business Line of Credit, the application process** only takes a few minutes. The approval process*** is quick too – your business could receive a funding decision in as little as six hours.
3. B2B Buy Now, Pay Later
A unique MCA alternative is to offer customers B2B buy now, pay later (BNPL) at checkout or on invoices. This solution works especially well for businesses that experience cash flow instability because of accounts receivable delays.
For example, you make a large sale and send off the invoice, but then you’re waiting for up to 30 days or more for the payment. Meanwhile, you have expenses to cover. This is a familiar scenario for businesses that offer traditional net 30, 60, or 90 repayment terms.
When you partner with a B2B BNPL provider like BackdPayments, you can offer net terms or extended terms of up to 24 months without the risk or the waiting. You receive payment right away while your customers get the extra time they need, eliminating the need for a costly MCA.
Choose a More Strategic Funding Solution
While MCAs do offer quick access to cash, the downsides make it a risky way to go. Instead, consider flexible financing options that can strategically cover cash flow gaps without the high costs and unstable repayment structures.
Backd offers three alternatives to help you get the business funding you need:
Business Term Loan: Get up to $1.5 million and term lengths of up to 24 months.
Business Line of Credit: Access revolving credit of up to $1 million when you need it.
BackdPayments: Offer net terms and buy now, pay later to your customers without the risk.
Apply now to get started.
*Loans are decisioned and funded by one of Backd's lender partner banks.
** Your application, including the amount, cost, and approval, is subject to review and is not guaranteed. Terms and conditions subject to change without prior disclosure or notice.
*** Decisions and funding may take additional time and not be same-day. Additional information may be required. Time to receive funds varies based upon your financial institution's receiving schedule and operating hours.
