How a merchant cash advance works

What a merchant cash advance is

A merchant cash advance (MCA) is a sale of part of your future receivables at a discount. The funder pays you a lump sum today. In return, it buys the right to collect a larger, fixed amount from your future sales. That fixed amount is the advance times the factor rate.

Because the cost is a fixed dollar amount and not a yearly charge, a factor rate looks cheaper than it is. That is why every calculator on this site converts it to an estimated APR, the yearly measure loans are quoted in, so you can compare an MCA side by side with a term loan or line of credit. New York's commercial finance disclosure law already requires providers to show that estimated APR on covered offers.

How it is collected: a split of sales or a fixed debit

There are two ways a funder collects, and your contract says which one you have.

• A split of sales. A set share of each card batch goes to the funder until the payback is delivered. Slow week, smaller payments. Busy week, bigger ones.
• A fixed debit. The funder pulls the same dollar amount from your bank account every business day or every week. The amount was estimated from your past sales, but it does not move on its own when sales drop.

Most of the risk sits in the second type. A fixed debit is not a share of your sales, even if it was sized from them, and the New York Attorney General's case against Yellowstone Capital turned on advances it called "illegal high-interest loans disguised as merchant cash advances." If your debit is fixed, reconciliation is the clause that protects you.

Reconciliation: the clause to read first

Reconciliation is the process for adjusting a fixed debit to what you actually sold. You send proof of lower sales, usually bank statements, and the funder resets the payment to the agreed share of real revenue. It is what keeps a fixed-debit MCA tied to your sales instead of to a calendar.

Before you sign, find the reconciliation clause and answer four questions:

1. How often can you ask for it: monthly, or any time?
2. What proof does the funder need, and how many days does it have to respond?
3. Is the adjustment required when you qualify, or left to the funder's choice?
4. Does it work both ways, raising payments when sales rise?

Regulators watch this clause. In its 2023 settlement with Yellowstone Capital, the New Jersey Attorney General required the companies to be transparent in future MCA agreements "regarding fees and reconciliation rights."

The true cost, worked out

Take a $50,000 advance at a 1.35 factor rate with $1,000 in fees taken out up front, collected by a fixed debit every business day over about 9 months.

Change any number below to run your own offer. The estimate assumes the payback pace you enter.

For the full version with fees and weekly debits, use the MCA true-cost calculator.

What you sign besides the contract

An MCA agreement usually comes with paperwork that matters as much as the price. Look for these:

• A UCC filing. A public notice that the funder has a claim on your receivables. Other funders see it. When you have paid in full, you can demand that it be ended; under UCC 9-513 a secured party must act within 20 days of an authenticated demand in most cases. Our early payoff guide covers how.
• A personal guaranty. Read what you, the owner, promise personally, and what counts as a default that triggers it.
• A confession of judgment. A signed statement that lets the funder get a court judgment without a lawsuit. In New York, one can be filed only with the clerk of the county where the signer said they lived or now live (CPLR 3218(b)), and Vermont's 2026 law voids them in covered commercial financing from July 1, 2027.

Where the law stands

As of Oct 20, 2026, 12 states have enacted commercial financing disclosure laws that can reach MCAs (Vermont's takes effect in 2027), and they differ on dollar limits and on whether brokers must register. New Jersey has none yet; two bills are in committee. See our state disclosure law table and the New Jersey MCA law guide.

Enforcement does not wait for a disclosure law. New Jersey had none in January 2023 when its Attorney General settled with Yellowstone Capital for $27.375 million, forgiving the balances of all New Jersey customers. In New York, the Attorney General's settlement canceled $534 million in merchant debts to Yellowstone.

When an MCA fits, and when it does not

An MCA can make sense for a short, specific gap that will pay for itself: inventory you know will sell, a repair that reopens a revenue stream, or payroll in a seasonal dip with sales already booked. It fits businesses with steady card or bank deposits that a bank turned down or could not fund in time.

It is usually the wrong tool when:

• you need the money for a long time, where a product with a lower estimated APR and a longer term usually costs less;
• you would use it to pay another advance (that is stacking, covered in our stacking guide);
• the daily debit would be more than your slowest week can carry.

Compare it with a line of credit, a term loan or invoice factoring first.

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