The Pros and Cons of Merchant Cash Advances

In the world of small business financing, not every entrepreneur fits neatly into the traditional lending box. That’s where merchant cash advances (MCAs) come into play. Fast, flexible, and often accessible even when traditional loans aren’t, MCAs have become a go-to funding source for many small businesses. But are they the right choice for your business? Let’s dive into the pros and cons of merchant cash advances, understand how they work, and explore if they align with your long-term financial goals.

What Is a Cash Advance Loan?

A cash advance loan is a short-term funding solution where a borrower receives a lump sum of money upfront and agrees to repay it with future income. While this can refer to several types of loans, the term is often associated with credit card cash advances or merchant cash advances. The main appeal lies in the quick access to funds, though it typically comes with higher interest rates and fees than standard loans.

What Is a Merchant Cash Advance?

A merchant cash advance (MCA) is not technically a loan. Instead, it’s a financing arrangement where a business receives a lump sum of money in exchange for a portion of future credit card or daily sales. This type of funding is especially popular among businesses that process a high volume of credit card transactions, such as restaurants, retail stores, and service providers.

Unlike traditional loans, MCAs aren’t bound by typical lending standards. This makes them appealing to business owners who struggle to meet the requirements for loan application with banks or credit unions.

How Does a Merchant Cash Advance Work?

When you accept an MCA, you agree to pay back the advance with a percentage of your daily credit card or overall sales, plus a fee. Instead of paying a fixed monthly amount like you would with a loan, the payments vary depending on your sales volume.

There are two main types of MCAs:

Traditional Merchant Cash Advance

With a traditional merchant cash advance, the repayment is automatically deducted as a percentage of your daily credit card transactions. The lender works directly with your payment processor, taking a cut of your sales every day until the advance is repaid.

ACH Merchant Cash Advance

An ACH MCA (Automated Clearing House) is repaid through daily or weekly withdrawals from your business checking account, regardless of your credit card sales. This method is more flexible in terms of repayment structure, and can work for businesses that don’t rely solely on credit card transactions.

Pros of Merchant Cash Advances

MCAs offer a lifeline for many small businesses in need of fast cash. Here are some of the most notable benefits:

1. Almost Immediate Access to Cash

Speed is one of the biggest advantages of an MCA. Approval and funding can happen in as little as 24 to 48 hours, making it a perfect solution when you’re facing urgent expenses or unexpected cash flow gaps.

2. Easy Repayment

Instead of fixed monthly payments, you repay the advance based on a percentage of your daily sales. That means when your business is slower, your payments are smaller—making repayment more manageable.

3. Low Credit Score Acceptable

Unlike banks that have strict requirements for loan application, MCA providers focus more on sales volume than credit history. So even if your credit score isn’t great, you may still qualify for funding.

4. No Restrictions on Loan Use

With traditional loans, you often need to specify how the funds will be used. Not with MCAs. You can spend the money however you see fit—whether that’s covering payroll, purchasing inventory, or upgrading equipment.

5. No Need to Put Up Collateral

Banks often require collateral like real estate or equipment when reviewing a loan application. MCAs, on the other hand, are unsecured, meaning you don’t have to risk your business assets to get funding.

Cons of Merchant Cash Advances

Despite their perks, MCAs can be expensive and risky. Here are the major downsides to consider:

1. Extremely High APR, Potentially as High as 200 Percent

The effective annual percentage rate (APR) for MCAs can be astronomical—ranging from 40% to 200% or more. This makes them one of the most expensive forms of business financing on the market.

2. High Payment Frequency That Can Hinder Cash Flow

Since payments are made daily (or at least weekly), your business must have consistent revenue to keep up. If sales slow down, those frequent deductions can put serious pressure on your cash flow.

3. No Impact on Business Credit Score or Report

Paying back an MCA on time won’t boost your business credit score, because MCA providers don’t typically report to credit bureaus. This limits your ability to build credit for future financing.

4. Binding in Ways That Other Loans Aren’t

Many MCAs come with confusing terms, aggressive collection tactics, and restrictions that can limit your flexibility. Some contracts even include clauses that prevent refinancing or early repayment without penalties.

5. Unavailable to Small Businesses That Don’t Accept Credit Card Payments

Since traditional MCAs rely on credit card sales, businesses that don’t process many card transactions might not qualify—or they’ll need to opt for an ACH-based advance, which may have different terms.

Does a Merchant Cash Advance Impact Your Credit?

A merchant cash advance typically doesn’t impact your personal or business credit score—unless you default on the agreement. In that case, the provider may take legal action or involve collections, which could affect your credit.

However, because MCA providers don’t report to credit bureaus, successful repayment won’t improve your score, unlike a traditional loan. This can make it difficult to build a stronger financial profile over time.

If you’re trying to strengthen your financial future or qualify for larger loans, a traditional loan might be a better choice, especially if you can meet the requirements for loan application with a bank.

What Banks Look for When Reviewing a Loan Application

While MCAs have looser qualifications, traditional lenders take a stricter approach. If you’re considering a bank loan instead, here’s what banks look for when reviewing a loan application:

Strong credit score (typically 650+)
Proof of consistent revenue and profitability
Detailed business plan
Collateral (for secured loans)
Time in business (often 2+ years)
Debt-to-income ratio

If you’re lacking in any of these areas, an MCA may be a temporary alternative—but be cautious of the long-term costs.

Why Vyde Is the Best Accounting Partner for Tax Season

Whether you’re navigating an MCA agreement, applying for a business loan, or managing your financial records, having a trusted accounting partner can make all the difference. That’s where Vyde comes in.

Vyde specializes in helping small business owners optimize their financial decisions, stay compliant, and prepare for tax season with confidence. From deducting MCA-related expenses to ensuring accurate reporting, Vyde’s team of experts is there every step of the way.

Plus, if you’re considering applying for a traditional loan down the line, Vyde can help improve your finances to meet the requirements for loan application—setting you up for long-term success.

Merchant cash advances can be a fast and flexible solution when you need money urgently—but they come at a high price. While they’re attractive to businesses with low credit scores or inconsistent revenue, the sky-high APRs and frequent repayments can quickly eat into your profits.

Before making a decision, weigh the pros and cons of merchant cash advances carefully. Consider your current cash flow, sales consistency, and long-term goals.

Need help evaluating your financing options or preparing for a traditional loan application? Vyde has your back. Our team can provide smart financial guidance tailored to your business needs—so you can borrow wisely and grow confidently.

The Pros and Cons of Merchant Cash Advances

What Is a Cash Advance Loan?

What Is a Merchant Cash Advance?