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A merchant cash advance was originally structured as a lump-sum payment to a business in exchange for an agreed-upon percentage of future credit card and/or debit card sales.[1] The term is now commonly used to describe a variety of small business financing options characterized by short payment terms (generally under 24 months) and small regular payments (typically paid each business day) as opposed to the larger monthly payments and longer payment terms associated with traditional bank loans. The term "merchant cash advance" may be used to describe purchases of future credit card sales receivables or short-term business loans.[2]


Merchant cash advance companies provide funds to businesses in exchange for a percentage of the businesses' daily credit card income, directly from the processor that clears and settles the credit card payment. A company's remittances are drawn from customers' debit and credit-card purchases on a daily basis until the obligation has been met. Most providers form partnerships with payment processors and then take a fixed or variable percentage of a merchant's future credit card sales.[3]

These merchant cash advances are not loans—rather, they are a sale of a portion of future credit and/or debit card sales. Therefore, merchant cash advance companies claim that they are not bound by state usury laws that limit lenders from charging high-interest rates.[4] This technicality allows them to operate in a largely unregulated market and charge much higher interest rates than banks.[5] On June 10, 2016, a New York Supreme Court judge presiding over a published merchant cash advance case ruled that "if the transaction is not a loan, there can be no usury," adding also that asking the court to convert an agreement to sell future receivables into a loan agreement "would require unwarranted speculation." [6]

This structure has some advantages over the structure of a conventional loan. Most importantly, payments to the merchant cash advance company fluctuate directly with the merchant's sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Advances are processed quicker than a typical loan, giving borrowers quicker access to capital. Also, because MCA providers typically give more weight to the underlying performance of a business than the owner’s personal credit scores, merchant cash advances offer an alternative to businesses who may not qualify for a conventional loan. An example transaction is as follows: A business sells $25,000 of a portion of its future credit card sales for an immediate $20,000 lump sum payment from a finance company. The finance company then collects its portion (generally 15-35%) from every credit card and/or debit card sale until the entire $25,000 is collected.[7]

Usage and Repayment MethodsEdit

Merchant cash advances are most often used by retail businesses that do not qualify for regular bank loans and are generally more expensive than bank loans.[8] Competition and innovation led to downward pressure on rates and terms are now more closely correlated with an applicant's FICO score.[9]

There are generally three different repayment methods:[citation needed]

  • Split withholding: When the credit card processing company automatically splits the credit card sales between the business and the finance company per the agreed portion (generally 10% to 22%). This is generally the most common and preferred method of collecting funds for both the clients and finance companies since it is seamless.
  • Lock box or trust bank account withholding: All of the business's credit card sales are deposited into a bank account controlled by the finance company and then the agreed upon portion is forwarded onto the business via ACH, EFT or wire. This is the least preferred method since it results in a one-day delay in the business receiving the proceeds of their credit card sales.
  • ACH withholding: When structured as a sale, the finance company receives the credit card processing information and deducts its portion directly from the business's checking account via ACH. When structured as a loan, the finance company debits a fixed amount daily regardless of business sales.

Merchant Cash Advance in the Economy TodayEdit

Small businesses take out loans and cash advances when they believe that the opportunities offered by expanded financial assets will outweigh the costs. This means that sentiments among small business owners will be paramount in financial decisions.

If small businesses owners feel optimistic about the economy and growth, they will be far more likely to expand, upgrade, and invest. Fortunately, the small business optimism index skyrocketed to nearly unprecedented highs in December of 2016, reaching 105.8 points. Such numbers haven’t been seen since 2004, years before the financial crisis nearly destabilized the global economy.[citation needed]

Digging into the numbers, 32% of small business owners believe that now is a good time to expand.[10] Most small businesses don’t have the cash on hand to fund an expansion by themselves, and will instead have to rely on external funding, such as a merchant cash advance. [11]

Industry sizeEdit

As of 2013, the industry was estimated to be funding at least $3 billion a year to small businesses.[12] DailyFunder is a website that tracks the merchant cash advance industry.[13]

Trade AssociationsEdit

While not exclusive to merchant cash advances, the Small Business Finance Association and Commercial Finance Coalition are the industry's primary 501(c)(6) non-profit trade associations.[14][15]

Industry ConferenceEdit

Broker Fair largely caters to the merchant cash advance industry, particularly its salespeople, with an emphasis on education, training, and networking. [16] The conference is held annually in New York City.

Licensing and CertificationsEdit

•California: When agreements are structured as true loans, a finance broker licensed under the California Finance Lenders Law may only broker loans to lenders licensed as finance lenders. [17]

•The industry training and certification course enables salespeople to receive a merchant cash advance basics certificate valid for two years. A product of industry self-regulatory efforts, a certificate is not legally required to sell merchant cash advances.[18]


  1. ^ Tozzi, John (9 January 2009). "How Merchant Cash Advances Work". BusinessWeek. Retrieved 11 July 2011.
  2. ^ Murray, Sean (5 March 2012). "Merchant Cash Advance Redefined". Retrieved 6 February 2012.
  3. ^ Loten, Angus (18 August 2011). "The Lure of Cash Advances". Wall Street Journal. Retrieved 18 August 2011.
  4. ^ Farrell, Maureen (31 January 2008). "Look Who's Making Coin Off The Credit Crisis". Retrieved 11 July 2011.
  5. ^ Elizabeth S. Bennett and Nitasha Tiku. "Thanks, But No Thanks". Inc. Retrieved 4 December 2012.
  6. ^ Murray, Sean (11 June 2016). ""Merchant Cash Advance Definitely NOT a Loan, New York Judge Rules". Retrieved 7 December 2016.
  7. ^ Goodman, Michelle (11 June 2012). "Case Study: How A Merchant Cash Advance Worked in a Pinch". Retrieved 21 May 2013.
  8. ^ John Tozzi (9 January 2009). "How Merchant Cash Advances Work". Bloomberg. Retrieved 8 November 2016.
  9. ^ Sean Murray (19 September 2012). "The End of an Era". Retrieved 6 February 2012.
  10. ^
  11. ^ Oguz Konar. "The Small Business Boom on the Horizon and How MCA's can Help". Local Marketing Stars. Retrieved 3 January 2017.
  12. ^ Sean Murray. "You Can't Ask How Big it is Without Defining What it is". DailyFunder. Retrieved 28 January 2014.
  13. ^ John Tucker (10 January 2016). "Merchant Cash Advance Predictions for 2016". deBanked.
  14. ^ "Small Business Finance Association". Retrieved 7 December 2016.
  15. ^ "Commercial Finance Coalition". Retrieved 7 December 2016.
  16. ^ "Broker Fair". Retrieved 2 March 2018.
  17. ^ "California Finance Lenders Law". California Department of Business Oversight. Retrieved 7 December 2016.
  18. ^ "Merchant Cash Advance Basics". CounselorLibrary. Retrieved 7 December 2016.