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How Much Does a Merchant Cash Advance Really Cost?

Thinking about a merchant cash advance for your e-commerce business? Find out why it might not be the easy funding solution you think it is with this clear explainer.

As an e-commerce entrepreneur, you’re no stranger to fluctuating sales. But if you’re thinking of reaching for a merchant cash advance (MCA) to help with the latest cash flow dry spell, there are some things you should know first.

While it may be tempting to jump into an MCA to solve a cash flow emergency, doing so can come at a heavy price of which many e-commerce entrepreneurs are unaware.

If that sounds scary, that’s because it can be if you don’t fully understand the lay of the land.

The true cost of a merchant cash advance can be much greater than most retailers realize. And unfortunately, many MCA providers are happy to leave the details buried in the fine print. 

At SellersFunding, we’re working for big changes in the world of e-commerce funding. We know that when you need cash fast to keep the sales and inventory flowing, it can be easy to think  traditional loans (with their lengthy application processes and endless background screenings) or MCAs are your only options. 

In today’s article, we’re debunking the biggest myths and misconceptions surrounding MCAs by walking you through the reality of how a merchant cash advance works — and how much it’ll actually cost you.

The Truth About Merchant Cash Advances

  • What Is a Merchant Cash Advance? 
  • How Does a Merchant Cash Advance Work?
  • What Will a Merchant Cash Advance Really Cost You?
  • Is an MCA a Good Funding Solution for E-commerce?

What Exactly Is a Merchant Cash Advance? 

First things first, one of the biggest issues we see surrounding MCAs is that many e-commerce retailers simply aren’t clear on what a merchant cash advance actually is.

While some may refer to an MCA as a “merchant cash advance loan,” the truth is that MCAs act more like expensive payday advances than other loans.

Since an MCA isn’t a traditional business loan, there’s a whole different formula for how it works.

Unlike bank loans, lines of credit, and credit cards, business owners receive funds as a lump sum upfront from an MCA provider. Then the borrower repays the advance with a percentage of the business’s sales. 

In other words, you sell a percentage of future sales at a discount to a lender for an upfront cash advance. Essentially, you’re pledging to repay the advance out of your future profits.

For this reason, to qualify for an MCA in the past, businesses typically had to have large volumes of credit card sales. That’s not the case today. Many MCA providers analyze your overall sales and not just your credit card sales.

But while merchant cash advances have evolved over the years, there’s still a lot more to them than first meets the eye, especially when you get down into the fine print.

Let’s take a closer look at how MCAs really work.

How Does a Merchant Cash Advance Work? 

To get approved for an MCA, you’ll need to show proof of sales. The lender will analyze your statements to determine your average monthly sales, then decide what kind of advance you qualify for.

After you’ve gotten approved for an MCA and have received your funds, your lender will deduct the agreed-upon repayment percentage from each credit card sale swipe until it’s repaid.

Facts to Keep in Mind About Merchant Cash Advances:

  • Most MCA lenders will only work with e-commerce stores that accept credit cards.
  • It usually takes 48-72 hours to get approved for an MCA. This speed is why MCAs are popular. But with SellersFunding working capital, you can be approved just as quickly and get terms that are far more favorable than those that come with an MCA.
  • You typically don’t need to have strong business or personal credit, but you do need to meet the provider’s requirement for credit card and non-invoice sales 

MCA lenders usually place few stipulations on how you use the cash, which means you can use the advance pretty freely (SellersFunding working capital has NO restrictions on usage).

The Flip Side of MCAs

Let’s explore the hidden fees and astronomical paybacks you could see if you choose to apply for an MCA.

What Will a Merchant Cash Advance Really Cost You? (Hint: Your Factor Rate Is NOT Your APR)

MCAs come with notoriously high flat fees determined by what is known as the “factor rate”.

The factor rate, or merchant rate, represents the amount you’ll pay on the money borrowed. 

Unlike annual percentage rates (APRs), factor rates are written in decimals instead of percentages. Typical factor rates on MCAs range from 1.1 to 1.5 and apply to the original amount you borrow. Remember that factor means to multiply in this case. For example, 1.5 X original borrow.

Similar to interest rates, factor rates represent the cost of your funding. Your factor rate is built into your payment schedule, and the cost of borrowing doesn’t compound or change as you pay off your funding.

Other Fees You May Incur with a Merchant Cash Advance Include:

  • Loan fee or origination fee: a percentage of the total advance charged to originate the loan
  • Bank fee: the processing fee charged for setting up the transaction
  • Underwriting fee: a fee that covers the costs of underwriting any potential loss
  • Risk fee: a fee that covers the time and effort providers put into evaluating your risk profile
  • Broker fee: a fee paid to intermediaries who may have brought your MCA application to the provider
  • Administrative fee: the fee charged to set up your account
  • Application fee: a fee you pay to apply for the MCA

That is a lot of fees. It’s also important to keep in mind that MCA providers often deduct these fees from the original advance.

For example, if you get approved for an advance of $20,000 and the provider charges $4,000 in fees, you’ll only receive $16,000.

MCA Payments and Repayments

Payments are usually disbursed to you daily or weekly You will typically repay them using one of the following repayment methods: 

  • ACH Withdrawal: The provider will automatically deduct the repayment from your business checking account. 
  • Lockbox or Bank Withholding: Your bank will split your credit card sales between the MCA provider and your bank account.
  • Split Withholding: The credit card processor will split your credit card sales between the provider and your merchant account, sending the percentage directly to the provider.

Providers take repayments via a “holdback percentage.” This is the sales percentage that will be held back and remitted to the MCA provider. The holdback percentage isn’t like an interest rate paid on a loan, but rather the percentage of sales taken for repayment.

Holdbacks are typically between 10-20%, so if your daily credit card sales are $3,000 and you have a holdback of 10%, the provider will keep $300 per day as part of their repayment.

Time to Crunch the Numbers on MCAs

With the factor rate and the many fees, how much does an MCA really cost? How much will you have to pay back? Let’s break down an example of borrowing via MCA:

  • You’re approved for a $50,000 MCA at a factor rate of 1.3. 
  • Your payment is based on monthly credit card sales and you do about $100,000 in these sales every month.
  • Your holdback percentage is 10%.

MCA Example Results:

  • Your estimated daily payment would be $333.33 over the term of 196 days.
  • Your total payback amount for the $50,000 MCA you got will be $65,000.
  • For this loan, you will pay $15,000 in interest.
  • This translates to an effective APR of 104.02%! 😮

Calculation courtesy of NerdWallet’s MCA Calculator

But wait, that doesn’t include the merchant cash advance fees!

If the total cost of fees works out to $3,000, you’ll only receive an amount of $47,000. And you’ll pay back $65,000 — an astonishing $18,000 loss.

The math says it all. Merchant cash advances simply weren’t built with most business owners’ best interests in mind. Fortunately, there are now better and more transparent funding options purpose-built for e-commerce growth.

Is an MCA a Good Funding Solution for E-commerce?

If you’re feeling discouraged about the sheer number of shady funding products on the market, you’re not the only one. Navigating the business loan landscape as an e-commerce entrepreneur with completely different growth challenges from traditional businesses can feel like tiptoeing through a minefield.

We started SellersFunding because we’re sellers just like you. We’ve successfully scaled multiple e-commerce businesses and we continue to innovate solutions to fill cash flow gaps without compromising future growth. 

That’s why we created flexible funding solutions e-commerce owners can feel good about. 

Not only do we offer zero usage restrictions (use your money however you want!), you also keep 100% of your equity. Our terms range from 3-24 months and we can get you funded from $5K-$5M in as little as 48 hours.

As an alternative to a merchant cash advance, our working capital line of credit comes with:

  • No hidden fees
  • No impact on your credit score 
  • A no-commitment application  
  • Competitive rates
  • Terms that fit your schedule

Growing sellers need cash flow solutions that work for (not against) their businesses. But when business owners jump the gun and settle for MCAs, they also risk sacrificing sales and profits for incredibly steep fees and factor rates.

No matter how you choose to grow your business, know that you’re not alone

If you’re ready to explore better ways to fund your e-commerce business, we’re here to help. Register today with no commitment and learn how growing merchants just like you are using flexible e-commerce funding to reach whole new levels of success.


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Ready to grow your business?

Contact a SellersFi expert to see your growth options and get started!

By clicking on the button above, you agree to receive SellersFi marketing communications.

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