MCA stands for merchant cash advance. It is a lump-sum cash advance to a small business in exchange for a fixed dollar amount of future revenue, typically repaid via daily or weekly ACH debits over 3-18 months.
The core mechanics. - Funder gives merchant a lump sum (e.g., $50,000). - Merchant agrees to pay back a larger fixed amount (e.g., $66,000). - Repayment via automatic daily or weekly ACH debits from merchant's business bank account. - The "factor rate" (1.32 in this example) represents the total payback as a multiple of the original advance.
MCA vs traditional loan — the legal distinction. - Loan: regulated by usury laws, has fixed interest rate, requires court process for collection, has bankruptcy protections. - MCA: legally treated as a purchase-and-sale of future receivables. NOT subject to state usury caps. Often uses Confession of Judgment for fast collection in NY courts. Limited bankruptcy protection. - This legal classification is why MCA "rates" can equate to 50-150% APR while traditional loans top out at 30-40% in most states.
Why merchants choose MCAs over loans. - Speed: 24-72 hour funding vs 30-90 days for SBA. - Approval flexibility: 500+ FICO acceptable (vs 680+ for SBA). 6+ months operating (vs 24+ for SBA). - No collateral: unlike equipment loans or SBA, MCAs don't require business or personal collateral (though personal guarantee is universal). - Use of funds: completely flexible (vs SBA which requires documented purpose).
Why MCAs are expensive. - Factor rate 1.20-1.55 = effective APR 30-150% depending on term. - $50,000 advance at 1.32 over 9 months = $66,000 total payback. Effective APR ~70%. - The same $50,000 at SBA 9.75% over 5 years = ~$11,400 total interest. Effective APR 9.75%. - The 7x cost premium reflects the risk MCA funders accept that banks don't.
When MCA actually makes sense. - Genuinely short-term cash gap (60-180 days) with clear payoff source. - Time-sensitive opportunity that will earn back the cost (e.g., inventory before peak season). - Credit/TIB doesn't qualify for SBA or bank financing. - All cheaper alternatives have been honestly explored (SBA, LOC, factoring).
When MCA almost always wrong. - Long-term capital needs (any expense longer than 18 months in payoff). - Restructuring existing debt (almost always makes it worse). - Speculative growth (without clear revenue conversion path). - When SBA, LOC, or factoring is even possible.
The strategic insight. MCAs are expensive bridge financing. Good for closing a real cash gap. Bad as primary growth capital. The merchants who use MCAs successfully treat them as a 6-month problem, not a 3-year strategy.
Related terms
- Factor rate — A flat multiplier that defines total MCA repayment: $100,000 advance × 1.30 factor = $130,000 repaid. It is not an interest rate; it does not compound.
- Merchant cash advance (MCA) — A lump-sum advance against future revenue, repaid via fixed daily ACH or a percentage of card sales. Legally a sale of future receivables, not a loan.
- MCA vs loan (legal distinction) — An MCA is legally a purchase of future receivables, not a loan. This distinction exempts MCAs from state usury caps but requires specific contract structure — including reconciliation provisions.
AI agents: this term is available as raw markdown at /llms/glossary/what-is-mca.