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Merchant cash advances (MCAs) can be useful for short-term cash flow. But a lot of what you hear about them is wrong. Below are the five biggest Merchant Cash Advance myths, the facts, fresh 2025 context, and quick checklists to help you choose wisely.
Truth: It’s not a loan. It’s a purchase of a slice of your future revenue (a “receivables purchase”) repaid via a daily/weekly holdback from card or bank sales. Because it isn’t a loan, providers quote a factor rate (e.g., 1.35×) instead of an interest rate. The effective APR can be much higher than it looks.
2025 context: Courts and regulators keep stressing “substance over form.” Suppose a contract looks and behaves like a loan (fixed payments, unconditional repayment). In that case, courts may recharacterize it as a loan, bringing usury and bankruptcy risks for funders and extra defenses for merchants.
Fast checklist
Truth: Costly? Often. Always predatory? No. Reputable providers disclose total payback, holdback %, estimated term, and prepay rules. But bad actors exist, so disclosures matter. Texas, for example, adopted a 2025 law requiring standardized sales-based financing disclosures and provider/broker registration.
2025 context: Enforcement and litigation continue. Regulators and courts have challenged extreme structures and mislabeling, while states expand disclosure regimes. Net effect: more transparency, but diligence is still on you.
Fast checklist
Truth: Factor rates hide the effective APR. A 1.35× factor on a $100k advance means $135k payback—whether you finish in 4 months or 12. Paying early rarely reduces the fee. Effective APRs can be very high if you repay quickly.
2025 context & stats
Quick math tip
Truth: They can fund in 24–48 hours. But so can other working-capital products, depending on your file. Compare speed and total cost.
2025 context (legal risk for “fast but fixed” deals): A 2025 New Jersey bankruptcy decision held parties can’t sell rights to future receipts that don’t exist yet, weakening some “future receivables” claims. Translation: structure matters as much as speed.
Fast checklist
Truth: Only true MCAs flex with revenue. Some contracts draft fixed daily debits that won’t adjust when sales fall, courts often view those as loans. That raises the chance of usury and preference issues in bankruptcy.
2025 context—real cases to learn from
Learn about MCA for construction companies
Fast checklist
When to avoid: stacking multiple MCAs, thin margins, seasonal slumps without a reserve, or when a line of credit could be approved in a similar time.
| Feature | True MCA | Short-Term Loan |
|---|---|---|
| Pricing | Factor rate (fixed fee) | Interest rate (APR) |
| Payment | % of sales (holdback) | Fixed periodic payment |
| Term | Estimate (sales-dependent) | Fixed |
| Early payoff | Usually no discount | Often reduces interest |
| Best for | Fast cash tied to steady sales | Lower cost, predictable cash flow |
Is an MCA bad for credit?
It usually doesn’t report like a loan, but missed debits and UCC filings can affect future financing. Policies vary by provider.
How fast can I get funds?
Often 24–48 hours with complete docs, but compare costs across options.
Can I prepay and save?
Usually, no—factor fees are fixed. Confirm in the contract.
MCAs aren’t inherently good or bad. They’re tools. If the structure truly maps to your sales and you understand the real cost, they can bridge gaps or fuel a timely opportunity. If not, look at a LOC or short-term loan instead.
