Funding a Small Business: Merchant Cash Advance for the Small Business Owner and How to Calculate True Cost

Small business loan vs. Merchant Cash Advance

What is merchant cash advance?

Merchant cash advance is one option for small business working capital financing. You obtain funds by ‘selling’ your future credit and debit card receipts to a merchant cash advance provider.  The Provider advances you a cash lump sum for these receipts and determines the amount you must pay back over time. The Provider arranges with the credit/debit card companies to receive a fixed percentage of your daily receipts to pay back this amount.  The actual time it takes to pay off your advance will depend upon the volume of credit/debit card proceeds coming in.  You should know, as a small business loan option, the true cost of the merchant cash advance can be very high. 

Why use merchant cash advance?

Merchant cash advance is most often used by small retailers and restaurants, with a high volume of credit/debit card receipts, in need of working capital that do not yet qualify for traditional bank lines of credit.  Often when a small company is growing, it does not produce enough cash flow to pay its expenses incurred in growing the business.  A merchant cash advance provider is more willing to lend to smaller operations or businesses with weak credit since they are looking to be paid back from the credit/debit card proceeds, not the business owner.  No additional collateral or personal guarantees are needed.  Also, the time to obtain financing is usually pretty quick. 

The downside to merchant cash advance is the extremely high cost.  As a small business owner, you need to consider both (1) the payback amount and (2) how rapidly this amount is paid back.  It may surprise you to learn that the faster you pay back the advance, the higher your annual percentage rate (“APR”)!

How do I calculate the true cost of merchant cash advance?

The term of merchant cash advance financing is not fixed but depends upon how quickly your credit/debit card proceeds come in.  The typical merchant cash advance financing term is less than one year.  You will not see an annual percentage rate (“APR”) published.  To calculate the true cost of merchant cash advance, you need to have the following information:

Factor rate: The multiple of the cash advance that determines how much you need to pay back over the specified time period.

Example: $50,000 Advance x 1.3 factor rate = $65,000 Payback Amount

Retrieval rate: The percentage (%) of your credit/debit card proceeds (“Receivables”) that is used to repay your advance on a daily basis.  Example: $2,000 Ave. Daily Receivables outstanding  x  12% = $240 Daily Repayment

Inputting this information into a loan calculator, you can calculate the true cost of merchant cash advance.  In this example, your annual interest rate appears to be 30% based on the factor rate of 1.3x.  However, because you are paying off your balance daily, your APR is actually significantly higher at 73.8%. Given the high APR, merchant cash advance is not usually the best financing option available to you. 

To calculate the true cost of merchant cash advance utilize this online loan calculator.

Calculate true cost of merchant cash advance

What are the alternatives to merchant cash advance?

Small business owners who are in need of working capital but do not yet qualify for traditional bank lines of credit may be eligible for financing from community lenders, such as Community Development Financial Institutions (“CDFIs”). CDFIs are primarily non-profit organizations that have access to lower cost community and economic development loan funds to provide smaller dollar amount loans to business owners who do not meet conventional banking criteria.  Many CDFIs are also “Community Advantage” lenders that offer SBA loans up to $250,000. The U.S. SBA is the largest funding source for small businesses in the United States.   The APR on CDFI and SBA financing is significantly less than merchant cash advance!


If you are a small business owner in need of working capital, avoid the high cost associated with financing products such as merchant cash advance, factoring, and typical online loans by exploring alternative, lower cost financing options available through your local CDFI.  To learn more about Excelsior Growth Fund and its SmartLoan product, click here.


About Excelsior Growth Fund

Excelsior Growth Fund (EGF) helps businesses in New Jersey, New York and Pennsylvania grow by providing streamlined access to business loans and advisory services. EGF’s signature product, the EGF SmartLoan™, provides up to $100,000 in fast, transparent, and affordable financing through a secure online platform. Larger loans up to $500,000 are also available. EGF is a nonprofit organization and is certified by U.S. Department of Treasury as a Community Development Financial Institution (CDFI). Learn more