A merchant cash advance (MCA) business is a company that gives small businesses quick access to money in exchange for a portion of their future sales.

Here’s how it works in simple terms:

1. The advance: The MCA company gives a business a lump sum of cash up front.

2. The payback: Instead of fixed monthly payments like a traditional loan, the business pays back the MCA company by giving them a percentage of its daily or weekly sales until the full amount (plus fees) is paid back.

3. The cost: Because it’s not a traditional loan, MCA fees and rates are usually much higher than a bank loan.

Example:
A coffee shop needs $20,000 quickly to buy new equipment. A merchant cash advance company gives them the $20,000. In return, the coffee shop agrees to give the MCA company 10% of its daily sales until it’s repaid $26,000.

In short: It’s fast money for businesses, but it’s pricey because the MCA company takes on more risk.

1. They charge more than they give you:

   • If they advance a business $20,000, they might require the business to pay back $26,000.

   • That $6,000 difference is their profit (minus their costs).

2. Factor rates (not interest rates):

   • MCAs use something called a factor rate instead of a normal interest rate.

   • Example: A factor rate of 1.3 on a $20,000 advance means the business must pay back $26,000 ($20,000 × 1.3).

   • This is a fixed amount; it doesn’t matter how fast or slow the business pays it back.

3. Daily/weekly payments:

   • MCA companies collect payments automatically by taking a percentage of daily or weekly sales.

   • This steady cash flow protects them and speeds up their profit.

4. High risk = high cost:

   • Many businesses using MCAs can’t get bank loans, so they’re riskier to lend to.

   • To balance that risk, MCA companies charge more, which is where their profits come from.

Example:
Advance: $20,000 → Payback: $26,000
If the business pays it off in 6 months, the MCA company just made $6,000 profit in half a year (before expenses). That’s a much higher return than a typical bank loan.

1. They get their money back quickly

• Example: An MCA company gives a business $20,000 and expects to be repaid $26,000 (factor rate 1.3).

• The business pays it back in 6 months.

This means they earn $6,000 profit on $20,000 in just 6 months.

2. Annualized return is huge

If you annualize that return (because they can lend the money again once it's repaid):

• Profit in 6 months: $6,000 / $20,000 = 30%

• If they do that twice a year: 30% × 2 = 60% annual return

Compare that to a bank loan at 8-10% per year. It’s way higher.

3. They recycle the same money many times

• Once the $20,000 is repaid, the MCA company can lend it to another business right away.

• The faster businesses pay back, the more times the MCA company can re-use the same cash, multiplying profits.

4. Daily/weekly payments reduce risk

• Because payments are collected daily or weekly, MCA companies see cash flow almost immediately.

• This lowers the chance of big losses and allows them to quickly spot businesses that might be struggling.

Example of scaling up:

If an MCA company has $1 million to lend, and they earn 30% profit every 6 months, they can make:

• $300,000 profit in 6 months

• $600,000 profit in a year (before expenses)

That’s a 60% return on their money in a year, which is huge compared to traditional lending.

⚠️ The flip side: It’s profitable because it’s risky. Many businesses default (can’t pay back), so MCA companies have to charge high fees to cover those losses.

1. Where the money comes from (the capital)

MCA companies need a pool of money to lend. They get it from:

• Their own cash (founders/investors)

• Private investors or hedge funds

• Lines of credit from banks or financial institutions

👉 The bigger the pool, the more advances they can fund simultaneously.

2. MCA companies target businesses that:

• Process lots of credit card or debit card sales (restaurants, retail, e-commerce, etc.)

• Can’t easily get bank loans

• Need quick cash for operations or growth

   

4 .How they find clients (small businesses)

• Third party Brokers: Independent salespeople/companies that refer businesses to them (for a commission).

• Cold calling/emailing small businesses.

• Partnerships: With credit card processors or accountants.

5. The approval process (fast & flexible)

MCAs don’t care much about credit scores. Instead, they look at:

• Monthly revenue (usually at least $5,000–$10,000)

• Bank statements & credit card sales history

• Time in business

👉 Because it’s simpler than a bank loan, they can approve in 24–72 hours.

6. How the payback is set up (automatic)

• They take a percentage of daily/weekly sales (e.g., 10%).

• This is often done through the business’s credit card processor or directly from their bank account.

• Automatic payments = steady cash flow and lower risk for the MCA company.

7. Managing risk

Because many borrowers are high-risk, MCA companies:

• Charge high factor rates (1.2–1.5 = 20%–50% profit potential).

• Spread their money across many small advances instead of a few big ones.

• Use personal guarantees (business owner is personally responsible).

• Monitor bank accounts/sales daily to catch problems early.

8. How they make money

• The spread: Advance $20,000 → Collect $26,000 = $6,000 profit (minus costs).

• Broker fees: If they also act as a broker, they get commissions from other MCA companies.

• Recycling capital: The faster they get repaid, the more they can re-lend.

9. The business machine (summary)

1. Raise capital (investors or credit lines)

2. Use brokers/ads to find small businesses

3. Approve and fund quickly

4. Collect payments daily or weekly

5. Reuse repaid funds to issue more advances