Merchant Cash Advance
Often shortened to MCA
What it is
A merchant cash advance is not a loan. A funder buys a slice of your
future revenue at a discount, and pays you for it today. You get a lump
sum now; the funder collects an agreed total back out of your sales over
the coming months.
Because it's a purchase of receivables rather than a loan, there is no
interest rate and no amortisation schedule. There is one fixed number
you owe — and it doesn't go down if you pay it off early, which is the
single most important difference from a loan.
How it works
You submit an application and typically three to six months of business
bank statements. The funder is mainly reading one thing: how much money
moves through your account, and how steadily. Credit is looked at, but
revenue carries the decision.
If approved, you're offered an advance amount and a
factor rate. Multiply them together and you get your
total payback — the whole amount you will repay. A $50,000 advance at a
factor rate of 1.30 means $65,000 back. The $15,000 difference is the
cost of the money.
How the payments work
Repayment is automatic. The funder debits your business bank account on
a fixed schedule — usually every business day, sometimes weekly — until
the total payback is collected. You don't write a cheque and you can't
skip a payment; the debit is set up before the money lands.
On a daily-debit deal, that means roughly 21 collections a month. Work
out the daily number and compare it against your slowest week,
not your average one. This is where MCAs go wrong for contractors: the
debit doesn't pause because a client paid late or a job got rained out.
Typical terms
| Advance amount | $10,000 to $500,000, occasionally higher |
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| Factor rate | Commonly 1.15 to 1.49 |
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| Term | 3 to 18 months |
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| Collection | Fixed daily or weekly ACH debit |
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| Time to fund | Often 1 to 3 business days after signing |
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| Collateral | Not usually required; a personal guarantee often is |
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Ranges are what funders in this market typically do. They are not offers,
and your terms depend on your file.
Words you'll hear
- Factor rate
-
A multiplier, not an interest rate. 1.30 means you repay 130% of what
you took. It is applied once, up front — it does not accrue over time
and it does not shrink if you repay early.
- Total payback (or "RTR", right to receive)
- The full dollar amount the funder will collect. Advance × factor rate.
- Holdback / retrieval percentage
-
The share of daily revenue being collected. On a fixed-debit deal this
is effectively set at signing rather than floating with your sales.
- Personal guarantee (PG)
-
Your signature making you personally responsible if the business can't
pay. Most MCAs include one. Read who exactly is signing it.
- Confession of judgment (COJ)
-
A clause letting a funder obtain a judgment against you without suing
first. Banned or restricted in several states and no longer common —
but if you see one, get it reviewed before signing.
- Stacking
-
Taking a second advance while a first is still outstanding. Two sets of
daily debits out of one account is the most common way contractors get
into trouble, and most funding agreements prohibit it outright.
- Reconciliation
-
A contract provision letting you request an adjustment if your revenue
drops. Not every agreement has one, and where it exists it is usually
a request, not an automatic right. Ask before you sign, not after.
Worth doing the math on. A factor rate is not an APR and
the two are not comparable on their face. A 1.30 factor repaid over six
months costs far more in annualised terms than the "30%" suggests, because
you're repaying continuously rather than holding the full balance for a
year. If you want to compare an MCA against a bank product, ask for the
cost expressed as an APR and compare that.
Purchase Order Financing
Often shortened to PO financing
What it is
Purchase order financing pays your suppliers so you can deliver on an
order you've already won. It is tied to one specific confirmed order —
not to your business in general — and the funder is underwriting that
order, your supplier, and the creditworthiness of the customer who
issued it.
It exists for one situation: you have the work, you can't afford the
materials, and the client won't pay until you've delivered.
How it works
You bring the funder a confirmed purchase order or signed contract, plus
your supplier's quote. The funder pays the supplier directly — often not
the full cost, typically a large share of it — and the materials go out.
When the job is complete and you invoice, the customer pays the funder
rather than you. The funder takes its fees out of that payment and
forwards you the balance. The money never sits in your account, which is
exactly why funders will do this for businesses they wouldn't otherwise
advance to.
How the payments work
There is no daily debit and no payment schedule. The facility is repaid
in a single step when your customer settles the invoice. Your cost is
usually a fee charged per 30-day period the money is outstanding — so
the longer your customer takes to pay, the more it costs you.
That reverses the usual pressure. With an MCA your own cash flow drives
the cost; here your customer's payment habits do. Before you use
PO financing, find out how that customer actually pays, not how their
terms say they pay.
Typical terms
| Facility size | Generally tied to the order; $25,000 upward is common |
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| Share of supplier cost funded | Often 70% to 100% |
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| Cost | Commonly 1.5% to 4% per 30 days outstanding |
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| Term | Until the customer pays — usually 30 to 90 days |
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| Repayment | One settlement from the customer's payment |
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| What's underwritten | The order, the supplier, and your customer's credit |
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Ranges are what funders in this market typically do. They are not offers,
and your terms depend on the order and the customer.
Words you'll hear
- Purchase order (PO)
-
The customer's written commitment to buy. It has to be firm and
confirmed — a verbal go-ahead or a budget estimate won't fund.
- Supplier / vendor payment
-
The funder pays your supplier directly. You generally never touch this
money, and you can't redirect it to payroll or another job.
- Assignment of proceeds
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The paperwork directing your customer to pay the funder instead of you.
Your customer will know you are using financing — plan for that
conversation rather than being surprised by it.
- Letter of credit
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A bank instrument sometimes used instead of cash to guarantee your
supplier will be paid. Common where the supplier is overseas.
- Gross margin requirement
-
Most funders want to see a minimum margin on the order — often around
20% or better — because the financing cost has to fit inside your
profit for the deal to make sense for either side.
- Dilution
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The gap between what you invoice and what actually gets paid, after
disputes, short-pays, back-charges and retainage. High dilution makes
an order harder to finance.
- Retainage
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The percentage a construction customer holds back until final
completion. It delays part of the payment the funder is waiting on, so
say so up front if your contract has it.
Best fit. PO financing works when the problem is
materials on a specific job and you have a creditworthy customer
on the other end. It is a poor fit for general working capital, payroll
across several jobs, or anything where there isn't a single confirmed
order to attach the money to.
Revenue-Based Financing
Sometimes called RBF or a revenue share
What it is
Revenue-based financing sits between an MCA and a term loan. You take a
lump sum and repay an agreed multiple of it out of revenue — but the
payment is sized against what you actually bring in, on a longer runway
than an MCA typically allows.
You give up no equity and no board seat. The funder's return comes from
the agreed multiple, not from owning part of your business.
How it works
Underwriting looks at monthly revenue over a longer window than an MCA —
often six to twelve months — because the funder is trying to understand
your pattern, not just your volume. Seasonality helps rather than hurts
here; a business that slows every winter is a business with a knowable
shape.
You agree a repayment cap (say 1.2× to 1.5× the amount advanced) and a
percentage of monthly revenue that goes toward it. The term runs until
the cap is met.
How the payments work
Collection is usually monthly or weekly rather than daily, and is
calculated as a share of revenue. In a strong month you pay more and
finish sooner. In a slow month you pay less and the term stretches.
Be clear on which version you're being offered, because both exist:
a true revenue share genuinely floats with your sales,
while a fixed-schedule version sets the payment at
signing from your historical average and then debits that amount
regardless. The second is closer to an MCA than the name suggests. Ask
directly: "does this payment change if my revenue drops?"
Typical terms
| Amount | Commonly $25,000 to $500,000 |
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| Repayment cap | Often 1.2× to 1.5× the amount advanced |
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| Share of monthly revenue | Typically 3% to 10% |
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| Term | 6 to 24 months, depending on revenue |
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| Collection | Monthly or weekly ACH |
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| Equity given up | None |
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Ranges are what funders in this market typically do. They are not offers,
and your terms depend on your file.
Words you'll hear
- Repayment cap (or multiple)
-
The ceiling on what you'll repay in total, expressed as a multiple.
1.35× on $100,000 means $135,000 — and unlike an MCA's factor rate,
reaching it sooner is normally the point.
- Revenue share percentage
- The slice of each period's revenue that goes toward the cap.
- Revenue floor / minimum payment
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A clause setting a payment you owe even in a bad month. If one is
present, the financing is less flexible than "revenue-based" implies —
find it before you sign.
- Trailing revenue
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Your revenue over the preceding months, usually 6 or 12. It's the main
number your offer is sized from.
- Covenant
-
A condition you agree to keep to for the life of the facility — not
taking on other debt, for instance, or holding a minimum balance.
Breaking one can make the whole amount due.
- Prepayment terms
-
What happens if you settle early. Some agreements discount the cap;
others charge the full multiple regardless. This is worth asking about
before signing, not after you've had a good quarter.
Best fit. Revenue-based financing suits businesses with
uneven or seasonal income that can service a payment tied to actual
sales. If your revenue is flat and predictable, compare it against a
straightforward term loan first — you may do better.