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14 Jan
  • Editorial Team


Every business enterprise requires a smooth flow of working capital in order to sustain its operations and facilitate growth. Small businesses usually need external funding in order to meet these requirements until they can regulate their profits.

You can opt for a business loan but that is subject to your credit score and your ability to provide collateral. If yours is a fledgling business and does not meet the eligibility requirements for a traditional business loan, a merchant cash advance can be a great choice to raise business finance.

What is Merchant Cash Advance?

Merchant cash advance (MCA) is a lump-sum payment to businesses in exchange for a certain percentage value of future POS (Point of Sale) transactions. This mode of financing is appropriate for businesses that register a large volume of card-based sales such as restaurants and retail shops.

Technically speaking, MCA is not considered as a loan, but an advance given against a percentage of future sales. The repayment of MCA is structured in two ways, one of which is through an agreed-upon percentage of future card sales. The other way is through remitting fixed daily or weekly debits from your bank account, referred to as ACH withdrawals. The latter is a more popular option among businesses that do not make significant sales on credit/debit cards.

As compared to other loans, MCA does not come with a business loan interest rate, instead, it has a factor fee, which typically ranges from 1.2 to 1.5. For example, based on risk assessment, your MCA provider fixes a factor rate of 1.3 on an advance of Rs 5 lakh. Then the total repayment will be Rs 6.5 lakh, of which Rs 1.5 lakh will be the fees.

Why should you opt for merchant cash advance?

Flexible payments

As the repayments are based on the percentage of revenue from your daily card sales, the repayments are in proportion to your business's income. For example, if you have had good sales in a particular month, then your repayment amount for that month will be higher compared to a lean period. The repayment tenure ranges between 3 months to 12 months and depends on the amount of sales.

Minimal documentation

The MCA approval process is a lot simpler and requires minimum documentation. The provider looks for the following documents to approve the cash advance and decide on factor fee:

  • Current account statement for the last 12 months

  • Details of all existing loans

  • GST returns of 6 months before the loan application

  • IT returns of last 2 years, balance sheets and cash flow statements

  • Invoice/Purchase Order Copy

  • Bank statements of the POS machine for the previous 1 year

No collateral required

Most lenders ask for collateral when issuing loans in order to limit their liability, but getting a merchant cash advance does not require any collateral. Due to this, you can continue using your business assets as intended without putting them up as collateral. Future POS transactions act as a collateral for your MCA.

When should you avoid taking merchant cash advance?

While taking a MCA can seem like a convenient option, it is not always the most appropriate choice for your business. Here are some things you should consider before approaching an MCA provider.

High APR

APR or annual percentage rate represents the actual cost of the loan over the tenure of the loan and includes fees and all other related costs. The APR for MCA typically ranges between 40 to 350%, depending on the size of the advance, factor fee, and repayment tenure. Also, higher sales translate into higher APR because of the shortened repayment tenure.

It is an expensive loan product as compared to small business loan, whose APR ranges between 10-15%.

No early repayment benefits

There are no early repayment benefits on MCA since the factor fee is fixed and is not influenced by the repayment duration. Therefore, you will get no benefit of early repayment, even if you decide to refinance your loan on more attractive terms.

Easy to fall into debt-trap

While it is easy to avail MCA, it is an expensive form of small business loan and its misuse can lead to a dangerous debt cycle. Due to the daily repayment structure, it can deteriorate your cash flow status. And to overcome that situation, business owners may consider taking another loan, which will further weaken the business's finances.


It is important to choose the right kind of business finance to fund your operations. If you are a business owner, then MCA might look like an attractive financing option for your short-term business needs. However, despite the ease at which it can be obtained, MCA, as a financing option should be chosen if you have a steady positive cash flow that will not suffer due to daily payments.

Did You Know


The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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