Is a Merchant Cash Advance a Loan?

A merchant cash advance (MCA) is a type of financing that is commonly used by small business owners. While it is often described as a loan, technically it is not a loan in the traditional sense.

Instead of lending a specific amount of money that must be paid back over time with interest, an MCA provider gives a lump sum payment to a business in exchange for a percentage of the business’s future sales. This means that the provider is purchasing a portion of the business’s future revenue, rather than lending money to the business.

The repayment terms of an MCA are typically structured as a percentage of the business’s daily credit and debit card sales, which is called a “holdback”. This percentage is agreed upon in advance and is typically between 10% and 20%. The holdback continues until the advance is fully repaid, which can take several months or even years.

So while an MCA is not technically a loan, it is a form of financing that provides businesses with quick access to capital. It is important for businesses to carefully consider the terms of an MCA before accepting the funding, as the holdback can impact the business’s cash flow and profitability over time.