How an MCA works: you sell future sales for cash today
A merchant cash advance is a purchase of future receivables, collected by a split of sales or a fixed debit, subject to reconciliation. The funder pays you a lump sum now. In return it buys a set dollar amount of your future sales, called the payback amount.
- You get the advance, minus any upfront fees the funder takes out.
- The funder collects. With a split, it takes a set share of each day's card sales, often called the holdback, which typically runs 5% to 20%. With a fixed debit, it pulls the same dollar amount from your bank account every business day or every week.
- If sales drop, a fixed debit should be adjustable through reconciliation: you ask the funder to reset the debit to the agreed share of your actual sales.
- Collection stops when the full payback amount is delivered.
Because the funder is buying sales, an MCA is priced with a factor rate instead of an interest rate. That makes it hard to compare with a loan, which is why we convert it to dollars and an estimated APR below.
True cost: a $50,000 advance at 1.4 costs $20,000, and faster payback means a higher APR
Multiply the advance by the factor rate to get the payback. $50,000 x 1.4 = $70,000, so the advance costs $20,000, or 40 cents for every dollar you receive. The factor rate never changes with time, so the shorter the payback, the higher the estimated APR.
| Paid back over | Debits | Each debit | Total cost | Estimated APR |
|---|---|---|---|---|
| 9 months | 189 | $370.37 | $20,000 | About 95% |
| 6 months | 126 | $555.56 | $20,000 | About 142% |
With a sales split instead of a fixed debit, payback speed depends on your sales. NerdWallet's example of the same advance with a 10% holdback: at $100,000 in monthly card sales it is paid back in about 7 months, an estimated 125% APR; at $70,000 it takes about 10 months, an estimated 87.30% APR.
How we got these numbers
Payback = advance x factor rate. Each debit = payback / number of debits. The estimated APR is the yearly rate that makes those debits worth the cash you actually received, the same way a loan's APR is figured. Any fee taken out of the advance raises it further.
Try your own numbers in the MCA true-cost calculator.
Pros and cons: speed and easier approval, paid for with a high cost
Pros
- Fast: some funders pay in as little as 1 day.
- Easier to qualify for than bank financing; new businesses and owners with weak credit may qualify.
- With a true sales split, payments shrink when sales shrink.
Cons
- One of the most expensive kinds of business financing, with estimated APRs from 40% to 350%.
- Daily or weekly debits can squeeze cash flow, especially in a slow week.
- Contracts usually show a factor rate, not an APR, which makes comparison hard.
- Paying early often saves nothing unless the contract has an early payoff discount.
When an MCA fits, and when it doesn't
It fits when
- A short, specific gap you can see paying back, like stock for a confirmed busy season.
- You have been turned down for a line of credit or term loan and the need is real.
- Your card sales are steady and you have checked the daily or weekly debit against a slow week.
Look elsewhere when
- To pay off another advance or cover payroll that is short every month.
- When a line of credit, term loan or SBA loan is available to you, even if it is slower.
- When the debit would take more than you can spare on your slowest days.
Red flags: confession of judgment, stacking, fixed debits sold as a split, and no reconciliation
Read these clauses before you sign
Confession of judgment. A clause that lets the funder get a court judgment against you without a lawsuit if it says you defaulted. NerdWallet's advice is that a confession of judgment requirement "alone may be a reason to look elsewhere." Vermont will void these clauses in covered deals starting July 1, 2027.
Stacking. Taking a second advance while the first is still being collected. Every debit comes out of the same sales, so costs and debits pile up fast. Many contracts forbid it. See MCA stacking.
Fixed debits sold as a "percentage of sales". If the contract sets a fixed daily dollar debit, it is not a split of your sales, whatever the salesperson says. New York's Attorney General built its Yellowstone Capital case on this pattern; the settlement canceled $534 million in merchant debts.
No real reconciliation. Look for a written, mandatory process to reset the debit when sales fall, with a deadline for the funder to answer.
Renewal promises. Get any promise to renew or refinance "at 50% paid" in writing, with the cost.
State rules: some states require an estimated APR before you sign
Several states now require a written cost disclosure before a cash advance deal is signed, and some, like New York and California, require an estimated APR. New York covers deals up to $2.5 million, California up to $500,000, Virginia sales-based deals up to $500,000, and Vermont adds rules on July 1, 2027. Some of these states also regulate brokers like Batch Capital.
New Jersey has no commercial financing disclosure law yet. Bill S1760 was introduced on Jan 13, 2026 and sits in committee. See our state disclosure law lookup and the New Jersey MCA law guide.
This is general information, not legal advice, as of Oct 20, 2026.
Alternatives to an MCA usually cost less
- Business line of credit: draw only what you need; published APRs from 10% to 99%.
- Term loan: a lump sum on a fixed schedule; published APRs from 6% to 99%.
- SBA loans: the lowest capped costs, but slower. SBA microloans go up to $50,000.
- Invoice factoring: if customers owe you on invoices, sell those instead of future sales.
- Revenue-based financing: payments rise and fall with monthly revenue.