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What is a Merchant Cash Advance?

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Last editedMar 20212 min read

A merchant cash advance (MCA) is a form of credit. Rather than being paid directly as a loan, it is calculated on the basis of credit card sales that have been deposited into the business account of a merchant. The key difference between a merchant cash advance and a standard loan from a bank or other lender is the way that the credit-worthiness of the borrower is judged. 

How the lender decides on a merchant cash advance

When evaluating an application for a merchant cash advance the lender will look at the daily credit card receipts of the merchant to assess whether they feel the advance could be paid back promptly. This looser form of credit rating means that the interest rate charged on a merchant cash advance can be higher than that of other finance options. For this reason any merchant contemplating a merchant cash advance needs to balance the speed, convenience, and availability of the loan with the details of the terms to decide whether it is right for them.   

What is holdback?

Holdback is a term that applies to the repayment method operated for a merchant cash advance. In simple terms, the lender deducts a certain percentage from each credit card payment the merchant receives until the amount borrowed, plus interest, has been paid back. The usual amount falls somewhere between 10% and 20%, and the more credit card transactions a business carries out the faster the merchant cash advance will be repaid. 

Is holdback the same as interest rate on a merchant cash advance? 

Holdback and the interest rate on a merchant cash advance are two different things. Most providers of merchant cash advances charge what is known as a “factor rate”. The average factor rate tends to range from 1.5 to 1.9 and works in the following way:

A merchant takes out a merchant cash advance of $10,000 with a factor rate of 1.5. This means that the amount to be paid back on the advance will be $10,000 x 1.5, which equals $15,000. At first glance this might look like an interest rate of 50%, but the factor rate differs from a standard APR by not being amortized.

How the factor rate of a merchant cash advance differs from APR

The difference between a factor rate and an APR is that the factor rate is calculated up front using the total amount of the merchant cash advance, while APR is amortized, which means that the interest on each repayment is calculated using what is left on the loan, and so gets lower as the amount is repaid. A loan of $10,000 with an APR of 50% would cost $2,661.94  

The pros and cons of a merchant cash advance


  • Speed – an MCA is often paid within a week with relatively little paperwork.

  • No collateral – the merchant won’t have to put up collateral for a merchant cash advance, and therefore won’t risk losing business assets if they can’t repay. As an alternative the lender will probably need a personal guarantee. 

  • Flexibility – the amount being paid will drop if sales drop, as repayments are a percentage of those sales.  


  • High interest – depending on factors such as fees and the length of time it takes for the merchant cash advance to be repaid, the APR on the loan could ultimately climb to triple figures. 

  • Early repayment – unlike some other loans, a merchant cash advance offers no reward for repaying the amount borrowed early. The fees are fixed by the factor rate, which means that paying the money back quickly doesn’t cut the interest rate, as is the case with an amortized loan.  

  • Lack of oversight – to date, the merchant cash advance industry isn’t covered by federal regulation, as the merchant cash advances are treated as commercial transactions rather than loans. In each individual state the merchant cash advance market will be covered by the Uniform Commercial Code which applies.   

We can help

Find out more about how a merchant cash advance could work for your business and whether it would be better than a small business loan at GoCardless. In addition to our financing expertise you can find out how GoCardless can help you with ad hoc payments or recurring payments.

Over 85,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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