A Merchant Cash Advance (MCA) isn't technically a loan. Instead, it's an advance on your business's future credit and debit card sales. Here's the deal: a provider gives you a lump sum of cash upfront. In return, they automatically take a fixed percentage (called the 'holdback' or 'retrieval rate') of your daily or weekly card sales until the agreed-upon amount is repaid.
This repayment structure is the defining feature – payments fluctuate directly with your sales volume. Busy day? You repay more. Slow day? You repay less. This can be helpful for businesses with seasonal or unpredictable revenue.
Sarah's restaurant needs $20,000 for urgent kitchen repairs. She gets an MCA with a 1.4 factor rate (meaning she'll repay $20,000 x 1.4 = $28,000) and a 10% retrieval rate. Each day, 10% of her credit card sales automatically go to the MCA provider until the $28,000 is fully repaid.
MCAs don't use traditional interest rates (APR). Instead, they use a factor rate – a multiplier applied to the advance amount to determine the total repayment. Factor rates typically range from 1.1 to 1.5.
Calculation: Advance Amount x Factor Rate = Total Repayment Amount
Example: $20,000 Advance x 1.4 Factor Rate = $28,000 Total Repayment
🚨 Crucial Warning: Factor rates make it hard to compare costs directly with loans. A seemingly low factor rate can translate to a very high effective Annual Percentage Rate (APR), often ranging from 40% to over 200%, especially if repaid quickly. Always calculate the total cost and compare it to other financing options.
MCAs are most suitable for businesses that:
Khojie helps you determine if an MCA is truly your best option or if alternatives like a line of credit might offer better value.
The provider analyzes your past card sales volume and determines a percentage (holdback rate) that allows them to recoup the advance plus fees within the agreed timeframe (typically 3-18 months).
It's less common, but some providers offer advances based on total bank deposits rather than just card sales. However, the core principle remains repayment tied to revenue.
Generally, no. Since MCAs aren't loans, providers typically don't report your payment history to business credit bureaus.
It can be, but only when speed is paramount and other, cheaper options aren't available. Use it for short-term, high-ROI opportunities where the potential profit significantly outweighs the high cost of the advance.
An MCA can provide rapid cash, but it's crucial to understand the costs. Let Khojie help you compare MCAs against other funding solutions to make the smartest choice for your business.
