What Is a Merchant Cash Advance? 5 Features That Explain Its Cost and Risk

A merchant cash advance is not a loan. Rather it’s an advance payment against your future revenues. Or, to put it another way, you’re selling the revenue of your business at a discount in order to get the cash today. Business owners turn to a cash advance when they need funds immediately. But merchant cash advances come with some serious drawbacks for you. Some of these drawbacks are part of the way merchant cash advances work. Let’s take a look at these 5 features of merchant cash advances so you can understand the costs and risks.

The transaction in a merchant cash advance is a sale of your future credit and debit card sales. This means that the finance company owns a piece of your future sales. This is different than a business loan, where the lender loans you money at a certain interest rate with the expectation of being repaid. Since the sale of the future revenue is not subject to the same rules as a loan, the company can often get away with charging a substantially higher price. In New York, for example, charging over 25% a year on a loan can be criminal usury, and it’s a felony. A merchant cash advance that calls for over 25% a year might be called usury if a court finds that it acts like a loan.

Finance companies use a factor rate to describe the price of a merchant cash advance. The factor rate is multiplied by the amount you need today to determine the total sales price. That means that if you borrow $20,000 at a factor rate of 1.4, you’ll pay $28,000. A factor rate is a cost that doesn’t consider how long you have the money. Factor rates usually fall between 1.1 and 1.5. The cost of a merchant cash advance depends on how long you have to pay it back. The faster you repay a merchant cash advance, the more expensive it will be. For example, you’d expect to pay more per year for a merchant cash advance that you repay in four months than one that you repay in 12 months. Although not labeled as an interest rate, the annualized cost of a merchant cash advance can run from about 40% to more than 300%, depending on the factor rate and length of the term. FTC staff say that calculating the cost of a merchant cash advance as an APR reveals that the rate can reach triple digits. One drawback to merchant cash advances is that you usually can’t save money by paying them off early, since the total amount you will pay is set from the outset. A few merchant cash advance providers do offer discounts if you prepay, but it’s far from universal. So ask.

Splitting the Sales

You make payments on your merchant cash advance by having the lender automatically deduct from your business bank account, or by automatically taking a certain percentage out of every transaction. The merchant cash advance lender will ask you for your merchant account information. That allows it to get paid first from the credit card processor. That process is called splitting the sales. Under that arrangement, typically 10% to 20% of your sales can be taken from you before you see the money. A split holdback moves with your sales. So on a slow day, you’ll hand over less of the sales. That kind of flexibility can help with cash flow. But an advance repaid by ACH debit takes a fixed amount from your bank account every day or week, whether you sold a lot that day or not. This can be a big problem for you if your business fluctuates seasonally. It means that you might end up short of the cash you need in the lean months.

Some providers offer a way out if your sales fall short: a reconciliation clause. The clause allows you to ask to have the payment amount lowered if your revenue drops. In practice this doesn’t always work as you’d expect. Some lenders may not do reconciliations when you ask them to, FTC staff say. A New York action found one large provider took daily fixed payments from business bank accounts regardless of revenues, so the advances acted like fixed-payment loans. If a provider claims your payments adjust with your revenues, get an exact explanation of how and how quickly the adjustments are made. Get it in writing, not a verbal promise on a sales call.

Serious Actions Against You

If you fall behind on a merchant cash advance, the lender could take serious actions against you in a short period of time. Some contracts include a UCC-1 financing statement, which is a lien that can allow a creditor to claim assets in the business, including receivables. Then they can notify your processor or customers and redirect money owed to you to pay off the advance balance. Many merchant cash advance contracts come with a personal guarantee clause, meaning if the business can’t pay, you can be personally liable for the debt. So if the business fails, you might have to make payments out of your own pocket or put your personal assets at risk.

Some merchant cash advance contracts contain a clause you should take note of and take seriously. A confession of judgment clause means you’re agreeing to let the funder get a court judgment against you without a hearing. And with a confession of judgment, you lose the right to fight in court about the collection. New York in 2019 restricted confessions of judgment against out-of-state businesses. A few states have restricted them, while a few others have banned them outright. The contract usually specifies which state’s laws apply. A business attorney can tell you how your state’s laws affect a merchant cash advance contract you are considering.

Brokers Called Independent Sales Organizations

Many merchant cash advances are sold by brokers called independent sales organizations, or ISOs. They gather and shop your application to several lenders. The ISOs may be paid on commission. To make sure you aren’t being steered toward an expensive option, discuss all the costs of the advance before you commit. Before you sign a contract, ask the funder or broker for the full costs in writing, including the total repayment and the annualized percentage. As of 2026, ten states - led by California and New York - require cost disclosures. Most other states do not, but you can still ask.

Whatever merchant cash advance you consider, run the numbers first and do the math twice. Then do it a third time, with a disaster month of revenue built in. Try to avoid a cycle of taking another advance to cover the first. That can lead to a spiral of borrowing. If you fall behind on a merchant cash advance, talk to an attorney about your options.