How a merchant cash advance works
A provider reviews historical sales, advances an agreed amount and sets the fee and collection terms. A percentage of eligible daily sales is then collected until the agreed balance has been repaid, subject to the contract. Check exactly which processors and sales channels are included.
If sales fall, a percentage-based deduction may also fall, but that does not remove the obligation. Minimum payments, reconciliations, a final maturity date or other conditions can apply. Ask for these terms rather than relying on the phrase flexible repayments.
Compare the advance, fee and sales deduction separately
For illustration, a £20,000 advance plus a £3,000 fixed fee gives £23,000 total repayable and a factor rate of 1.15. If the collection share were 10% of £40,000 eligible monthly sales, £4,000 would be collected that month. At £25,000 sales, the same share would collect £2,500.
The figures are assumed, not a provider offer. The 15% fee is not a 15% annual rate. Faster sales can repay the advance sooner without reducing a fixed fee, increasing its annualised cost. Ask what happens on early settlement rather than assuming interest-style savings.
What is left after card-sales repayments?
A deduction is taken from receipts, not from profit. For a retailer or restaurant, the remaining cash must still cover stock or ingredients, wages, premises, tax and existing debt. Model a quieter period and higher input costs together, not one at a time.
Clarify treatment of refunds, chargebacks, cash sales and processor changes. If VAT or other amounts are included in the sales base, set aside the cash needed for those liabilities. Avoid layering multiple advances over receipts without understanding the combined deduction.
What evidence will an MCA provider request?
Common assessment inputs include payment-processing history, business bank statements, trading duration, ownership, existing finance and the pattern of refunds. Consistent real receipts are different from a forecast of future turnover.
There is no single turnover threshold or guaranteed advance multiple across the market. Provider examples are not minimum criteria. Check the legal borrower, any guarantee, security rights and access requested to sales or bank data before proceeding.
MCA versus a loan, card or revenue-based facility
A term loan usually offers a defined repayment schedule and interest basis. A credit card provides revolving spending credit. Revenue-based finance overlaps with MCA but may use a wider receipts base or offer fixed repayments. Compare the specific agreement rather than the marketing label.
An MCA may fit established sales-funded working capital, but a long-lived asset can call for asset finance and a large property purchase for a different structure. Compare the net funding, total fee, likely repayment timing and cash left after collections. No product is suitable simply because it can be arranged quickly.
A few things worth knowing
Common questions
Is a merchant cash advance interest-free?
A provider may advertise no interest, but a fixed fee still creates a finance cost. Compare total repayable and expected collection timing rather than interpreting no interest as free funding.
What is the difference between the factor rate and holdback?
The factor rate describes total repayable relative to the advance; a 1.15 factor on £20,000 gives £23,000. The holdback or collection share is the percentage of eligible sales used for repayments. They are different figures.
Are personal guarantees required?
Requirements vary by agreement. Do not assume an MCA has no personal guarantee, security or other obligations because repayments are linked to sales.
Do more sales always make an MCA cheaper?
Not necessarily. Faster collections can shorten the term without reducing a fixed fee. Check early settlement provisions and the annualised effect of repayment timing.