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Updated Nov 10, 2023

What Are Merchant Cash Advances and Working ?

Which option is best for your short-term financing needs?

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Max Freedman, Senior Analyst & Expert on Business Operations
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Sometimes, even the savviest small business owners find themselves unable to cover operational expenses. Merchant cash advances and working capital loans are financing options that can tide small business owners over with liquid capital delivered directly to their bank accounts. If, like many business owners, you need more cash on hand, you may be considering one of these financing options. When handled properly, these tools can keep a cash-hungry business running, but beware ― if misused, they may lead you into a vicious cycle of debt.

Editor’s note: Looking for a small business loan? Fill out the questionnaire below to have our vendor partners contact you about your needs.

Merchant cash advance vs. working capital loan

While merchant cash advances and working capital loans have much in common, there are distinct differences you should understand before choosing one for your short-term financing needs.

These financing options differ in the following ways: 

  • Loan vs. nonloans: Working capital loans mostly fall into the traditional loan category. When you take out a working capital loan, you receive a lump sum and repay it, usually in monthly installments. In contrast, a merchant cash advance technically isn’t a loan. While you get a lump sum with a merchant cash advance, it is repaid weekly or even daily via a percentage of your credit card sales. 
  • Annual percentage rate (APR): Merchant cash advances are known for their exorbitant APRs ― sometimes as high as 200 percent. Finding working capital loans with reasonable APRs is much easier.
  • Risk: Merchant cash advances can be risky because they’re based on money your business hasn’t earned yet. Working capital loans have less risk. For example, invoice factoring is a type of working capital loan. It’s based on your accounts receivable ― money you’ve already earned but haven’t received yet. 
  • Approval: Merchant cash advances are rarely tied to credit scores, so your approval odds are better. In contrast, working capital loans are tied to your credit score. If you have a spotty borrowing history, you may not qualify. 
  • Use allowances: Most merchant cash advances and working capital loans don’t impose usage restrictions. However, there are exceptions. For example, an equipment loan, another type of working capital loan, can only be used to buy equipment. Merchant cash advances have no such limitations.

Here’s an at-a-glance overview of how merchant cash advances and working capital loans compare: 


Merchant cash advance

Working capital loan

Loan vs. nonloan

Technically not a loan

A loan, by definition


Often exceedingly high

Often reasonable


Potentially high

Low to modest


Highly likely, even if you have a poor borrowing history

Unlikely if you have a poor borrowing history

Use allowances

No limits

Typically no limits, except with equipment loans

Did You Know?Did you know
A merchant cash advance is also referred to as credit card receivables financing or credit card factoring.

What is a merchant cash advance?

A merchant cash advance isn’t a traditional loan. Instead, it provides immediate cash in exchange for a business’s future credit card sales. When a business accepts a merchant cash advance, it essentially sells future credit card sales revenue.

Seasonal businesses or those with cyclical sales often use merchant cash advances to stave off cash flow problems during slow times. Business owners can pay operating expenses and wages when sales are slow and repay the merchant cash advance when their sales volume increases and they generate a profit.

Since projected sales back merchant cash advances, businesses with subpar credit scores often rely on them to inject short-term working capital.

TipBottom line
A merchant cash advance differs from a traditional cash advance. A cash advance is a short-term financing option you can access via a credit card.

How do merchant cash advances work?

A merchant cash advance typically offers an influx of capital based on a business’s expected credit card transactions over a specified term. For example, if your business receives a $100,000 merchant cash advance with a 52-week term and a factor rate of 1.25, you must repay $125,000 in credit card sales over the next year.

Here’s what you should know about merchant cash advances:

Merchant cash advances require weekly payments. 

Merchant cash advances generally are repaid weekly. According to Randall Richards, founder of Think Outside the Box, cash advance companies often draw the payment directly from a business’s checking account instead of the merchant account associated with its credit card transactions. 

“Weekly payments would be based on sales and a multitude of factors,” Richards explained. “Someone who is only doing $20,000 per month in sales won’t qualify for a $100,000 [advance]. The sales have to support the payment or else the lender is at risk of losing money.”

Merchant cash advances are flexible ― but expensive. 

Since merchant cash advances are based on sales, borrowers with poor credit who can’t get a business loan can usually access them. Of course, this flexibility means merchant cash advances are more expensive than bank loans. 

“Merchant cash advances are one of the alternatives today for people as they move down and become less and less creditworthy,” noted James Cassel, co-founder and chairman of Cassel Salpeter & Co. “Merchant cash advances could carry the equivalent of 40 percent interest rates.”

Notably, merchant cash advances don’t carry an interest rate of their own. Instead, their costs can be measured against the interest rates associated with a traditional loan. For example, if a $100,000 merchant cash advance costs a business $125,000 over 52 weeks, the interest rate equivalent would be 25 percent. 

This rate is much higher than many bank loans’ interest rates. If a business with excellent credit took out a bank loan, it may end up costing only 2 percent to 5 percent of the loan’s principal value. Understanding your factor rate and whether you can negotiate it helps reduce merchant cash advance costs.

How do you qualify for a merchant cash advance?

You must meet the following criteria and provide specific information to qualify for a merchant cash advance: 

  • You must accept credit card payments: The first requirement for most merchant cash advance lenders is that you accept credit card payments. These transactions will be used to repay the loan. 
  • You must show proof of your credit card sales volume: You must also demonstrate that you garner enough credit card sales to make loan payments in a timely manner.
  • You must have vital documents readily available: You’ll need to provide the merchant cash advance lender with your Social Security number, business tax ID, proof of citizenship and several months’ worth of credit card processing and bank statements.

Lenders will also evaluate the following factors: 

  • How long you’ve been in business
  • Monthly revenue 
  • Credit score

Lenders want to understand if you have a healthy, thriving business that can support repayment. They’ll likely approve you if you show that your company is profitable and capable of repaying its debt.

“You can qualify for a merchant cash advance by first applying through a reputable company,” advised Xavier Epps, financial expert and chief executive officer of XNE Financial Advising LLC. “Do your research first. Each company will have different requirements but, overall, these companies require less paperwork than traditional banks. The important thing is to make sure you can provide documentation for your business.”

FYIDid you know
While some business loan types have specific restrictions on how you can spend the money you borrow, merchant cash advances don't impose such limitations.

Pros and cons of a merchant cash advance

Like all financing, merchant cash advances have pros and cons. If you plan accordingly, they could be an effective tool for maintaining healthy cash flow and operating your business profitably. When misused, they can expedite the demise of a failing business. 

Consider the following pros and cons of merchant cash advances and how to navigate them.


  • Merchant cash advances provide immediate payment: Merchant cash advances are helpful because they immediately deliver a lump-sum payment to a business. When cash flow is struggling, you can bolster it with a quick influx of capital.
  • Merchant cash advances don’t require a high credit score: Merchant cash advances are based on sales instead of credit scores, meaning even borrowers with poor or no credit can access them.
  • It’s easy to qualify for a merchant cash advance: Qualifying for a merchant cash advance is relatively easy. It requires a few months of bank statements, a one-page application and some basic information about the business, such as its tax identification number, website and address.
  • Merchant cash advances have a fast approval process: Merchant cash advances can generally be approved more quickly than bank loans, which often take several months. In some cases, merchant cash advances deliver funding within a few days of approval.


  • Merchant cash advances are expensive: Merchant cash advances are generally very expensive, ranging from a high 40 percent equivalent rate to an astronomical 350 percent equivalent rate in extreme cases. The cost depends on the lender and several other factors. However, a merchant cash advance is always significantly more expensive than a traditional loan.
  • Merchant cash advances are only a one-time influx of capital: Merchant cash advances offer a one-time injection of a modest amount of capital. For many businesses, this isn’t a problem. For example, a seasonal business that must cover its operational costs in the lean months will likely do well with a merchant cash advance. However, a struggling business using a merchant cash advance while hoping sales eventually increase could be backing itself into a corner.
  • Merchant cash advances may have restrictive requirements: Your lender agreement may require your business to abide by specific rules. For example, you might be precluded from moving business locations or taking out additional business loans. Cassel advises business owners to review their merchant cash advance agreement with an attorney and negotiate contract details before signing.

What is a working capital loan?

A working capital loan is a small business loan or alternative financing option with a short repayment date. It’s designed to help businesses cover near-term costs. Borrowers may seek a working capital loan to pay wages, purchase equipment, acquire new properties or expand inventory. Seasonal businesses or those with cyclical sales often turn to working capital loans. 

There are several types of working capital loans, including the following:

  • Lines of credit: A line of credit isn’t a loan. It’s a predetermined amount of money a business can borrow at any time. Much like credit cards, lines of credit only incur interest on the balance borrowed, not the total value of the credit limit. Lines of credit are primarily extended by banks or credit unions, although sometimes businesses with enough leverage can negotiate a line of credit directly with a supplier. The amount of a line of credit is generally based on the business’s credit score.
  • Short-term loan: A short-term loan is generally a small-dollar loan to be repaid in one year. Short-term loans can reach up to $100,000, providing an injection of capital to cover operational expenses immediately. Interest rates on short-term loans vary but tend to be higher than long-term conventional loan rates due to their quick maturity period. (If you’re interested in finding a short-term lender, check out our Fora Financial review to learn about its flexible payment schedules and early payoff discounts.) 
  • Invoice factoring: Invoice factoring, also known as accounts receivable financing, is similar to a merchant cash advance in that it focuses on sales, not a credit score. A business sells a lender (or “factor”) its uncollected accounts receivable for a significant portion of the total value upfront. The factor then works to collect the outstanding payments and keeps the remaining percentage. Invoice factoring is generally considered less risky than a merchant cash advance because it’s based on existing accounts receivable. In contrast, merchant cash advances are based on projected future sales.
  • Equipment loan: Equipment loans are intended explicitly for acquiring or leasing equipment a business needs to operate. Generally, these loans are backed by the equipment itself as collateral instead of a business’s credit. If the business fails to repay the loan, the equipment can be repossessed.
FYIDid you know
The best small business loan for your business depends on your needs and circumstances. You may need a term loan, line of credit, equipment loan, working capital loan or a merchant cash advance.

How do you apply for a working capital loan?

Before applying for a working capital loan, evaluate your expenses to ensure you request the right amount of capital. 

You’ll need to present the following documents and information: 

  • Several months’ worth of bank statements, balance sheets and tax returns
  • Your employer identification number
  • Your business mortgage or lease documentation
  • Your business credit score 

You should also be prepared to answer the following questions:

  • How much money do you need?
  • How do you plan to use it?
  • When do you need it?
  • How much time do you need to pay it off?

The application process is generally straightforward and online. “Thanks to fintech [financial technology], many working capital providers have online applications where you can securely provide information on yourself, your business and some type of verification, like bank statements, credit card processing statements, connecting your accounting software or connecting your selling platforms,” explained Alex Sklar, vice president of strategic partnerships at Cover Genius. “Depending on your business and the partner you chose, funding can happen as fast as 24 hours.”

Did You Know?Did you know
Working capital funding is considered a fast business loan. You can often apply online and receive approval much faster than you could for a traditional bank loan.

What are the pros and cons of a working capital loan?

Here’s a closer look at the pros and cons of working capital loans.


  • Working capital loans have short repayment periods: Working capital loans have fast repayment periods, which is helpful for businesses that want to clear the debt from their books quickly. Repaying a loan within one year means you aren’t forced to pay interest on the loan for years to come.
  • Working capital loans are flexible: Depending on the type of working capital loan, funding is relatively flexible. Some loans, such as equipment financing, are more restrictive. However, lines of credit, short-term loans and invoice factoring can all be used to cover a wide range of costs.
  • Working capital loans have a fast approval process: Short-term loans generally have a faster approval process than conventional loans because they are designed to fill an immediate need for the borrower.


  • Working capital loans have high costs: A short-term loan matures more quickly than a traditional loan, so you should expect to pay higher interest rates. The interest rate varies by the precise type of loan, but working capital loans are generally more expensive than longer-term loans.
  • Working capital loans have short repayment periods: While the short repayment period is a blessing to companies that want to clear debt from their books, it can be challenging for businesses that struggle to repay their loans. Since working capital loans have a much narrower window than long-term conventional loans, you have much less time to repay the principal.

When should you seek a merchant cash advance vs. a working capital loan?

Specific circumstances will dictate whether a merchant cash advance or working capital loan is best for your business.

You should seek a merchant cash advance if:

  • You’re a new business or have poor credit: A merchant cash advance is more focused on your historical and future sales than your credit. In contrast, working capital loan approval is often contingent on your personal and business credit score. 
  • You need money immediately: A merchant cash advance has a short application process and can put cash in your hands within a few days. In contrast, a working capital loan has a more extensive application and approval process and takes a bit longer.

You should seek a working capital loan if:

  • You need financing over a longer period: With a working capital line of credit, you can keep the line open and use it when you need it. You only pay interest on the amount you borrow. This makes it suitable for use over longer periods. In contrast, a merchant cash advance is a one-time lump sum payment you’ll typically repay within a year.
  • You want to keep your lending costs low: Working capital loans tend to have lower APRs because the approval process is more rigorous and collateral is sometimes involved. APRs can run between 5 percent and 35 percent. In contrast, merchant cash advances have an equivalent APR of 40 to over 100 percent, making them an expensive option.

Use merchant cash advances or working capital loans wisely

Merchant cash advances and working capital loans are financing options that can buoy your business while you await future sales. However, without a clear plan, these lending options can spell disaster for a business.

To make the most of any type of financing, you should understand your loan repayment terms and create a careful plan to get out of debt. Detailed recordkeeping and a solid understanding of your business are critical.

Accepting financing while banking on future sales is a significant risk. When in doubt, consult an accounting professional before accepting money from any lender. With a bit of planning, merchant cash advances and working capital loans could be precisely the support you need until you’re back on track to profitability.

Jennifer Dublino contributed to this article. Source interviews were conducted for a previous version of this article.

author image
Max Freedman, Senior Analyst & Expert on Business Operations
For almost a decade, Max Freedman has been a trusted advisor for entrepreneurs and business owners, providing practical insights to kickstart and elevate their ventures. With hands-on experience in small business management, he offers authentic perspectives on crucial business areas that run the gamut from marketing strategies to employee health insurance. Freedman's guidance is grounded in the real world and based on his years working in and leading operations for small business workplaces. Whether advising on financial statements, retirement plans or e-commerce tactics, his expertise and genuine passion for empowering business owners make him an invaluable resource in the entrepreneurial landscape.
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