What is a merchant cash advance?
A merchant cash advance (MCA) provides an upfront amount in exchange for an agreed portion of future sales or receivables. It is commonly structured differently from an interest-bearing term loan. The contract determines the amount purchased, collection method and obligations. MicroCapital is a financing broker: ask our team which options are available for your business rather than assuming an MCA is offered to every applicant.
How collection affects cash flow
In a percentage-of-sales arrangement, the amount collected changes with eligible sales. Check what counts as sales, how often collections occur, and what happens if revenue falls or your processor changes. Do not assume every product adjusts automatically. Ask whether a quoted daily debit is fixed, how adjustments are requested and whether a minimum collection amount applies. Square’s Quebec funding documentation illustrates a percentage-of-card-sales model; other contracts can differ.
Factor rate versus interest rate: a worked example
If an illustrative $40,000 advance uses a factor of 1.25, the stated total is $50,000 and the difference is $10,000 before any additional fees. A factor of 1.25 is not a 25% annual interest rate. The time over which collections occur matters. With a hypothetical 10% sales holdback, $1,500 in eligible daily sales produces a $150 remittance, while $1,000 produces $100. These are arithmetic examples, not MicroCapital offers or repayment forecasts.
Compare an MCA with a business loan or line of credit
An MCA tied to sales, an amortizing term loan and a revolving credit line solve different cash-flow problems. Compare the net cash received, total dollars collected, fees, collection frequency and early settlement rules. A loan calculator using an annual interest rate should not be used by entering an MCA factor rate. Ask for a written explanation of any security, personal guarantee, renewal condition or restriction on additional financing.
Model collections against daily sales
Use several sales scenarios to estimate the cash left after collections, payroll and suppliers. Confirm which transactions count as sales, how adjustments are handled and whether there is a minimum payment or other contractual obligation.
Start with the cash you actually need
Build a use-of-funds budget before comparing offers. Separate one-time purchases from recurring expenses and identify when each payment is due. Requesting more than the project needs can add unnecessary cost; requesting too little can leave the project unfinished. Keep a reserve for ordinary operating expenses and compare the net amount you would receive after fees.
Compare the agreement, not just the headline number
Ask for a written breakdown of the total repayment, fees, payment frequency and term. Identify any security, personal guarantee, renewal condition or restriction on additional borrowing. Ask what happens if sales slow down or you repay early. A lower periodic payment is not necessarily a lower total cost; compare offers using the same requested amount and a realistic cash-flow forecast.
