A merchant cash advance is the purchase of a fixed dollar amount of your future business receipts, paid to you as a lump sum today and collected back as a share of your daily or weekly sales. It is a commercial sale of receivables, not a loan — which is why the agreement contains no interest rate and no maturity date.
The three numbers that define an advance
Every advance is built from three figures, and understanding them makes any offer easy to evaluate.
- Purchase amount — the cash that lands in your account.
- Specified amount — the total the provider is buying, and therefore the total you will deliver.
- Factor rate — the multiplier connecting the two. Purchase amount × factor rate = specified amount.
A $40,000 advance at a factor rate of 1.28 produces a specified amount of $51,200. The cost of capital is $11,200. That figure does not change if you repay faster, unless your contract specifically provides a discount for early satisfaction.
How repayment actually works
Collection happens in one of two ways. A card split takes an agreed percentage of each day's card settlements directly from the processor. An ACH structure debits a fixed daily or weekly amount from your business bank account, calibrated to your average revenue.
The distinction matters more than it first appears. A true card split moves automatically with sales, so a slow week costs less. A fixed ACH debit does not, though many agreements include a reconciliation clause allowing the amount to be adjusted to actual revenue on request. If that clause exists, know how to invoke it before you need it.
Why the annualised cost is higher than it looks
Because the specified amount is fixed at the start, the shorter the collection period, the higher the effective annual cost. The same $11,200 cost on a $40,000 advance is very different if it is collected over five months rather than fourteen. When comparing an advance against a term loan or a line of credit, convert everything to total dollars and to cost per month of use.
What to ask before you sign
- What is the specified amount in dollars?
- What is the remittance amount, and how often is it taken?
- How many remittances are expected at my current revenue?
- What fees are deducted from the purchase amount before I receive it?
- Is there a discount for early satisfaction, and is reconciliation available in writing?
When an advance makes sense — and when it does not
An advance tends to fit an urgent, revenue-producing need in a business with steady daily receipts: replacing equipment that has stopped production, buying inventory ahead of a known peak, or covering a short gap that will close. It fits poorly as a way to cover a recurring shortfall, because the remittance reduces the same cash flow that was already insufficient.
Taking a second advance while the first is still collecting — often called stacking — is where most businesses run into trouble, and it may also breach your existing agreement. If multiple advances are already in place, debt consolidation is usually the more constructive conversation.