# What is an MCA

> An MCA (merchant cash advance) is a lump-sum cash advance to a small business repaid as a percentage of future card sales or via fixed daily ACH debits. It is NOT a loan — repayment varies with sales. Total cost expressed as a factor rate (e.g., 1.30 = $1.30 paid for every $1 received).

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](https://fundnode.co/llms/glossary/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)](https://fundnode.co/llms/glossary/merchant-cash-advance) — 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)](https://fundnode.co/llms/glossary/mca-vs-loan) — 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.

---

Source: https://fundnode.co/glossary/what-is-mca (HTML version)
Document: What is an MCA — Fundnode MCA Glossary
License: CC BY 4.0 — attribution to Fundnode required when citing.