Merchant cash advance: A complete guide for founders

What is a merchant cash advance?

A merchant cash advance is a financing option that gives you a lump sum of capital upfront in exchange for a percentage of your future credit or debit card sales. It’s technically not a loan; it’s a purchase of future receivables.

Unlike traditional loans, merchant cash advances don’t require fixed monthly payments. Instead, the provider deducts a percentage of your daily or weekly card sales until the advance and its fees are fully repaid. When sales are strong, you repay more; when sales slow down, payments automatically decrease.

Originally designed in the 1990s to help retailers and restaurants get quick working capital, merchant cash advances have since expanded into industries that process frequent card transactions—including e-commerce stores and service businesses.

Why founders choose merchant cash advances

Timing is everything when you need to stock up before a busy season or cover unexpected expenses. With funding available within 24-72 hours, merchant cash advances offer quick access to funds without collateral and minimal paperwork.

In addition, approval is often based on sales volume rather than your credit score, making merchant cash advances an excellent choice for founders who may not qualify for traditional loans.

For international founders operating U.S. businesses without an established credit history, merchant cash advances can provide short-term relief that traditional banks often can’t.

Before considering a merchant cash advance, it’s also worth exploring a cash-flow tool that gives you more control. With Aspire, you can open a business account, issue corporate cards, track expenses in real time and access flexible finance tools, all in one platform.

How does a merchant cash advance work?

The merchant cash advance process starts with your sales data. Providers review your credit card processing statements to determine daily transaction volume. Based on the review, they determine how much to advance and what percentage to take from future sales.

Once approved, funds typically reach your account within one business day. The provider then collects repayment by deducting an agreed-upon percentage from your daily credit card sales, automatically through your payment processor.

The repayment mechanism

Most merchant cash advance providers use one of two collection methods

• The holdback method: The provider takes a fixed percentage of each card transaction (usually 10%--20%) until the balance is repaid.
  
• ACH withdrawal method: The provider debits your bank account daily or weekly, with amounts fluctuating based on recent sales.
  

The repayment period varies based on your sales velocity. A business processing high card volumes might repay in 4-6 months, while slower-moving businesses might take 12-18 months.

Merchant cash advance vs business loan: key differences

Merchant cash advances and business loans solve similar problems but work differently.

[Table:1]

Key difference: A merchant cash advance isn't legally classified as a debt. Instead, it’s structured as a purchase of future receivables. This means fewer regulations and reporting obligations, but also fewer borrower protections.

In the U.S., merchant cash advances are offered primarily by private financing companies rather than banks. They fall under Uniform Commercial Code (UCC) Article 9 rules, which govern secured transactions.

Since the UCC is a state-level commercial framework and not a federal law, merchant cash advances are treated as asset purchase agreements rather than credit extensions. This legal structure is the reason why merchant cash advances can bypass traditional state and federal lending laws, resulting in limited oversight and fewer borrower protections compared to traditional loans.

Merchant cash advance rates, fees and terms

Merchant cash advances use factor rates instead of interest rates, typically ranging from 1.1 to 1.5. You can multiply the advance amount by the factor rate to calculate the total repayment.

For instance, if you receive USD $50,000 with a 1.3 factor rate, you’ll need to repay USD $65,000 (USD $5,000 X 1.3). In this case, USD $15,000 is the cost of capital.

Translating factor rates to APR

At first glance, factor rates may seem low and manageable. However, the true cost becomes clearer when you convert them into annual percentage rates (APR), a metric that reflects how expensive the financing is over a year.

For example, a 1.3 factor rate repaid over 6 months and 12 months roughly equals 40–60% APR and 20–30% APR, respectively. This means the faster you repay, the higher your effective borrowing cost.

To help you estimate the true cost, the table below translates common factor rates into approximate APRs so you can make more informed financing decisions for your business.

[Table:2]

Additional fees may include origination charges (2–5% of the advance), processing fees and early repayment penalties. Always ask for a full breakdown before signing.

What determines your rate

Providers consider several factors when pricing your merchant cash advance, such as:

• Monthly card processing volume: Higher volumes usually mean better rates.
  
• Time in business: Established businesses tend to receive more favorable terms.
  
• Credit score: While not heavily weighted, it may still influence your rate.
  
• Type of industry: Restaurants and retail often get better rates than seasonal businesses or startups.
  

How to qualify for a merchant cash advance

Most merchant cash advance providers base approval on card sales, not credit scores. Typical requirements include:

• Monthly credit card sales of at least USD $5,000– USD $10,000.
  
• Be in business for at least 3–6 months, though some providers may want to work with newer businesses.
  
• A credit score above 500. It may help, but even founders with challenged credit can qualify if sales are strong.
  
• A business bank account and a consistent card processing history.
  

Required information

Each Merchant cash advance provider requires different documents. However, you typically need to provide:

• Three to six months of credit card processing statements and business bank statements
  
• A government-issued ID
  
• Proof of business ownership
  
• Tax returns(some providers may request them, though this is less common than with traditional loans).
  

If you’re an international founder operating a U.S. business, you’ll also need an EIN, a U.S. business address and a U.S. bank account. Personal credit history requirements vary by provider.

How to apply for a merchant cash advance

The application process is typically fast and simple.

• Compare multiple providers: Terms and factor rates can vary significantly
  
• Submit an online application: It usually takes 10–15 minutes
  
• Share sales data: Providers will request access to your payment processor to review sales data. This happens through a secure portal. They’ll also want to link to your business bank account to verify cash flow.
  
• Verification
  
• Approval
  

Application Timeline

Most applications move fast. Initial approval usually takes hours. Full underwriting takes 1-2 business days. Once approved, funds will be in your account within 24-48 hours.

The provider will set up automatic collection through your payment processor before releasing funds. Make sure you understand exactly what percentage they’ll take from each transaction.

How to calculate the cost of a merchant cash advance

As mentioned earlier, you can get the true cost of a merchant cost advance by converting the factor rate to APR. Here’s the step-by-step guide to calculate it:

• Step 1: Multiply the advance by the factor rate to get the total repayment
  
• Step 2: Subtract the advance amount from the total repayment to get the financing cost
  
• Step 3: Divide the financing cost by the advance amount
  
• Step 4: Annualize the financing cost based on the repayment term by dividing the result from Step 3 by the term (in years)
  

For example, suppose you receive a USD $50,000 advance with a 1.3 factor rate that must be repaid in 6 months. Therefore, the true cost of your funding is:

• Step 1: USD $50,000 x 1.3 factor rate = USD $65,000
  
• Step 2: USD $65,000 - USD $50,000 = USD $15,000
  
• Step 3: USD $15,000 / USD $50,000 = 0.3, or 30%
  
• Step 4: Six months equal half a year (0.5), therefore: 0.3/0.5 = 0.6 or 60% APR
  

Hidden costs to watch

Beyond the APR, be aware of additional costs that may apply. Some providers typically charge:

• Origination fees (ranging from 2–5%)
  
• Processing fees (might apply monthly)
  
• Renewal fees (apply if you renew or extend a merchant cash advance)
  
• Early repayment penalties
  

These fees can quickly increase your total financing cost, so always ask for a full fee breakdown and review the contract carefully before signing.

Pros and cons of merchant cash advances

Merchant cash advances solve specific problems but create others.

Pros:

• Fast approval and funding, often same-day
  
• No collateral or personal guarantees required
  
• Flexible repayment tied to sales (you pay less when sales are slow)
  
• Accessible to businesses with poor credit or limited history
  
• Minimal documentation compared to traditional loans
  

Cons:

• Extremely high costs, with effective APRs often over 40%
  
• Daily or weekly sales deductions impact cash flow
  
• Stacking multiple merchant cash advances can create a debt cycle
  
• Lack of regulation means fewer protections for borrowers
  
• May not be reported to credit bureaus, missing a credit-building opportunity
  

The biggest risk: if sales drop significantly, you’re still obligated to repay. Some providers’ contracts allow them to take funds from your bank account if card sales decrease too much.

How to choose a merchant cash advance provider

In the U.S., recent data shows that around 99% of merchant cash advance users are small businesses, making this financing option particularly relevant for small business owners. However, with so many providers available, it’s important to use sound judgment before committing to one. Here are 2 important steps to guide your decision.

Research providers

Research is key. You can start by comparing multiple providers and pay attention to these details:

• Pricing transparency: Reputable companies provide clear pricing, straightforward contracts, and responsive customer support. They’ll disclose the factor rate and all applicable fees upfront.
  
• Factor rates: These usually range from 1.1 to 1.5 for similar businesses
  
• Retrieval rates (the percentage taken from daily sales): Usually range between 10–25%
  
• Estimated repayment term: Understand how long it will take to repay the advance based on your sales volume
  
• Repayment flexibility: Look for providers that offer flexibility if sales drop unexpectedly
  
• Online reviews: Don’t rely solely on the star ratings; instead, focus on detailed feedback and patterns in complaints or praise.
  

Watch for red flags

Even if a provider looks good on paper, be cautious of warning signs that may indicate predatory practices.

• Pressure to sign quickly: Reputable providers give you time to review the contract carefully
  
• Vague fee structure
  
• Refusal to explain terms clearly: Providers should be willing to walk you through every clause in the agreement
  
• Request for upfront payments: Legitimate merchant cash advance providers never charge application fees.
  

Avoiding these red flags will help protect your business from unfair terms and unnecessary financial risk.

Alternatives to merchant cash advances

If you’re considering a merchant cash advance but find it too costly, several alternative financing options may better fit your business needs:

• Business lines of credit. Offer flexible access to capital at lower rates (typically 8–20% APR). You only pay interest on the amount you use. However, qualifying usually requires a stronger credit profile and more documentation than a merchant cash advance.
  
• Term Loans. Provide a lump sum of funding with fixed repayment terms and APRs ranging from 7–30%. Both banks and online lenders offer these loans. While approval takes longer, the overall cost is significantly lower than a merchant cash advance.
  
• Revenue-Based financing. Works similarly to a merchant cash advance but at a lower cost. Instead of taking a percentage of card sales, the lender takes a share of your total revenue. Repayment typically caps at a specific multiple, such as 1.2x–1.4x of the original funding amount
  
• Invoice financing. Allows you to access cash tied up in unpaid invoices. If your business serves other companies and extends payment terms, this option provides faster access to working capital. Costs usually range from 1–5% per month
  
• Business credit cards. Offer quick access to credit, often with 0% introductory APR periods. If you can repay your balance within the promotional period, this can be a more affordable short-term financing option
  
• SBA loans. Backed by the U.S. Small Business Administration, these loans offer some of the lowest interest rates (6–13% APR) but have longer approval times, typically 4–8 weeks. They’re best suited if you have strong credit and the ability to wait for funding
  

What happens if you default on an merchant cash advance?

Merchant cash advances are technically not loans, which means default works differently. If you stop processing enough card sales to meet minimum thresholds, many merchant cash advance contracts allow providers to debit your bank account directly.

Some agreements include confession of judgment (COJ) clauses, which require you to waive your right to defend yourself in court if you can’t repay. In states where COJs are permitted, this can allow a provider to obtain a judgment and freeze your bank accounts or seize assets without a standard court hearing.

However, some states have restricted the use of COJ clauses against small businesses. For instance, in New York, legislation passed in 2019 prohibits merchant cash advance providers from filing COJs against business owners who aren’t New York residents. This regulation aims to curb predatory collection practices within the merchant cash advance industry.

Options if you’re struggling

If cash flow problems make repayment difficult, communicate with your provider immediately. Some offer temporary adjustments to retrieval rates. Others might restructure the agreement.

Never ignore the situation—that makes it worse. Consider consolidating multiple merchant cash advances into one lower-cost option or moving them into a more affordable structure, such as a traditional loan, if your credit has improved.

Myths about merchant cash advances

Even though merchant cash advances are widely used by small businesses in the U.S., they’re also surrounded by confusion and misinformation. If you’re a non-U.S. founder operating in the country, it’s easy to see why merchant cash advances might seem controversial or even risky. Understanding what’s true—and what’s not—helps you evaluate merchant cash advances with clarity, so you can decide based on strategy, not fear

Myth: merchant cash advances are illegal or predatory by default.Truth: Merchant cash advances are legal but unregulated in most states. Some providers operate ethically, while others don’t. Always read contracts carefully.

Myth: You need perfect credit to get better financing alternatives.Truth: Many alternatives exist for founders with credit scores above 600. Even with challenged credit options like secured loans or revenue-based financing may cost less than merchant cash advances.

Myth: Factor rate is your interest rate.Truth: Factor rates hide the true cost. 1.3 factor rate paid in 6 months is roughly 40-60% APR, way higher than it seems.

Myth: Repayment flexibility means merchant cash advances are low risk.Truth: Sales fluctuations work both ways. If sales drop, you still owe the full amount, and providers can debit your bank account directly.

Myth: Merchant cash advances don’t affect your ability to get other financing.Truth: Daily sales deductions reduce cash flow, making it harder to service other debt. Multiple merchant cash advances can trap you in a cycle where you need new advances to cover old ones.

Conclusion

As a founder, you might consider a merchant cash advance to access quick capital—especially when credit challenges limit your options, and you need cash fast to cover short-term needs. However, merchant cash advances come with high costs, so it’s important to understand when this type of financing truly makes sense for your business.

Because of the cost, merchant cash advances should rarely be your first choice. If you decide to use one, do so strategically, such as for situations where speed outweighs cost and when you have clear visibility into future revenue. Always work with reputable providers, review every contract clause carefully and set a clear repayment plan.

In addition, if you’re facing longer-term cash flow needs, explore alternatives such as term loans, business lines of credit or invoice financing.

Once you secure funding, managing it efficiently becomes just as important—and that’s where Aspire can help. Aspire enables startups and global founders to manage U.S. finance operations, corporate cards and expense management in one connected, compliant platform.

Frequently asked questions

What credit score do you need for a merchant cash advance?

Most providers work with scores as low as 500. Some approved founders with scores below 500 if monthly card sales exceed USD $15,000. Your sales volume matters more than your credit score for merchant cash advance approval.

How long does it take to get funding from an merchant cash advance?

Most providers fund within 24–72 hours after approval. Some offer same-day funding if you apply early in the day and provide all the requested documents immediately.

Can international founders get merchant cash advances for U.S. businesses?

Yes. International founders operating U.S. businesses can qualify if they have a U.S. EIN, a U.S. business bank account and process card sales through a U.S. merchant account. Personal credit requirements vary by provider.

What’s the difference between a factor rate and an interest rate?

A factor rate is a multiplier (like 1.3) applied to the advance amount to calculate the total repayment. An interest rate is a percentage charged over time. Factor rates don’t decrease if you repay early, making them more expensive than they seem.

Can I pay off a merchant cash advance early?

Yes, but many providers charge early repayment penalties. Some use your estimated repayment timeline to calculate the penalty. Always ask about early payoff terms before signing.

How many merchant cash advances can I have at once?

There’s no limit, but having multiple merchant cash advances is a cash flow killer. Most providers won’t approve new advances if you already have 2–3 outstanding merchant cash advances.

Do merchant cash advances affect my business credit score?

Usually no. Most merchant cash advance providers don’t report to business credit bureaus. So, successful repayment won’t help build credit, but default won’t hurt your score immediately.

What industries work best with merchant cash advances?

Restaurants, retail stores, salons and e-commerce businesses that process high card volumes get the best rates. B2B companies with invoice-based sales struggle more since they don’t have consistent card transactions.

Are merchant cash advances tax-deductible?

Fees and costs associated with a merchant cash advance may be tax-deductible as a business expense. However, since an merchant cash advance isn’t a loan, the “interest” isn’t classified the same way. Consult a tax professional for guidance specific to your situation.

What happens to merchant cash advance repayment if sales drop suddenly?

Repayment slows since it’s based on a percentage of sales. But many contracts have minimum payment requirements. If you don’t meet minimums, providers may debit your bank account or trigger default clauses.

Disclosure: AFT US LLC, d/b/a Aspire, is a financial technology company, not a bank. The Deposit Account and banking services are provided by Column N.A., Member FDIC. FDIC deposit insurance covers the failure of an insured depository institution. Deposits in the Deposit Account are FDIC-insured through Column N.A., Member FDIC and Column's Sweep Program Network Banks. Certain conditions must be satisfied for pass-through FDIC insurance to apply.

The Aspire Secured Commercial Charge Card is issued by Column, N.A., Member FDIC, pursuant to a license from Mastercard. Approval is subject to eligibility. Payment of the account balance is due in full daily.