What is a merchant cash advance? How it actually works

How the money actually moves

The structure is simple once you strip the jargon. You agree to sell a fixed dollar amount of your future receivables, called the purchase amount or payback. The funder wires you a smaller amount today, called the advance. The gap between those two numbers is the funder's return for taking the risk.

Sizing runs off your bank deposits, not your credit score. Funders read your last four months of business bank statements and typically offer somewhere between half and 1.4 times your average monthly deposits. A shop depositing $80,000 a month might see offers from $40,000 up past $100,000, depending on how the statements read. Balances that hold, low NSF activity, and steady deposit counts push the number up. Negative days pull it down fast.

Speed is the product's whole appeal. From our desk, a clean file with four statements can have offers back the same day and money wired within a day or two of signing. Most funders do a short funding call before the wire to confirm you understand the terms and that the business is really yours. Then the daily debits start, usually the next business day.

What it costs, in real dollars

Advances are priced with a factor rate, not an interest rate. Factor rates typically run from 1.22 to 1.45. Multiply the advance by the factor and you get the payback. A hypothetical $50,000 advance at a 1.30 factor means you repay $65,000. That $15,000 is the cost, fixed on day one.

Here is the part most sales reps skip: because the cost is fixed and the term is short, the annualized cost is high. Far higher than a bank loan, a line of credit, or an SBA product. If you can wait a few weeks and you qualify at the bank, the bank is cheaper money and you should take it. An advance is expensive money you buy because you need speed, or because the bank already said no.

Watch the fees on top of the factor. Origination, underwriting, ACH, and wire fees usually come out of the wire before it hits your account. On that same $50,000 example, $2,500 in fees means $47,500 lands, but you still repay against the full $50,000. Always ask for the net funded amount in writing before you sign.

How payback works day to day

Repayment is usually a fixed daily debit on business days, with weekends and bank holidays off. Some funders debit weekly instead, especially on longer terms. Terms typically run 3 to 18 months. Take the payback, divide it by the business days in the term, and that is your daily hit. On our $50,000 example over eight months, $65,000 spread across roughly 170 business days works out to about $382 a day.

Technically that debit is meant to track a set percentage of your revenue, and the contract names that percentage. The fixed daily amount is an estimate of it. If revenue falls, most contracts let you request a reconciliation to lower the debit to match your actual sales. That right matters, and we cover it in detail in our contract guide. In practice the debit stays fixed unless you ask.

The daily pull is the discipline test. A few hundred dollars a day sounds fine until a slow week lands on top of payroll. Before taking an advance, we tell merchants to find their lowest deposit week in the last four months and run the math against that week, not the average.

Who it fits and who it does not

An advance fits a business with strong, steady deposits and a short-term use for the money that earns more than the money costs. Buying inventory for a season you know will sell. Covering a payroll gap while a large invoice clears. Taking a contract you could not otherwise take. Revenue-producing uses, on a business healthy enough to carry the daily debit.

It does not fit a business that is shrinking. Using an advance to cover ongoing losses just moves the failure date and makes it more expensive when it arrives. It also does not fit long payback horizons. Funding a renovation that pays off over five years with an advance repaid over eight months is a mismatch we see weekly and turn away.

Then there is stacking, taking a second or third advance on top of the first. Stacking kills businesses. Each new position adds a daily debit against the same deposits, and by the third position most merchants are borrowing to repay borrowing. Most contracts also prohibit it outright, so a new advance can put you in default on the old one. If you are thinking about a second position to cover the first, call your funder and ask about reconciliation instead.

What signing commits you to

The contract you sign is a receivables purchase agreement, and it commits you to more than the daily debit. You authorize direct debit access to your bank account. You almost always sign a personal guarantee of performance, which means that if you break the contract terms, the funder can pursue you personally. Many funders also file a UCC lien against the business, which other lenders will see.

You also agree to a list of covenants: keep the account open, do not switch banks without notice, do not block the debits, do not take another advance on top. Breaking these is a default even if you never miss a payment. Default typically makes the full remaining balance due at once and puts the guarantee in play.

None of this is hidden, but most of it sits on page six in dense type. Read the whole agreement, or have someone read it with you. We walk merchants through every contract we place, clause by clause, before anything gets signed. Any broker or funder who rushes you past the paperwork is telling you something.

Common questions