How a merchant cash advance works
In an MCA, a funder advances a lump sum and, in return, buys the right to collect a set amount of your future sales. Repayment is not a monthly loan payment; it is a fixed daily or weekly ACH withdrawal — sometimes a flat dollar amount, sometimes a percentage of card receipts — that continues until the agreed total is repaid. The cost is usually expressed as a factor rate (for example, 1.3), so a $50,000 advance at a 1.3 factor means repaying $65,000 regardless of how quickly you pay it back. Because the price is baked into the factor rather than charged as interest over time, repaying early does not save you money the way prepaying a loan would.
Why it isn't legally a loan
The defining feature of an MCA is that it is structured as a purchase of future receivables, not a loan. That distinction is not just semantics: loans are subject to usury laws and interest-rate caps, while a purchase of receivables generally is not. This is why MCA costs, when converted to an annual percentage rate for comparison, can run into the triple digits — far above what a lender could legally charge on a loan. Regulators and courts have scrutinized whether some MCAs are loans in disguise, and the FTC has brought enforcement actions against funders for deceptive terms and abusive collection, but as a category MCAs remain legal in most states.
The risks to understand
Three features make MCAs risky. The fixed holdback ignores how the business is doing, so a sales dip means the withdrawal takes a bigger bite of what is left. Stacking — taking a second, third, or fourth advance to cover the first — multiplies daily withdrawals until they can exceed revenue, the most common path into an unmanageable spiral. And most MCAs require a personal guarantee, so if the business cannot pay, the funder can pursue the owner's personal assets. Some contracts historically used a confession of judgment to obtain a court judgment without a normal lawsuit, though several states have restricted that practice. An MCA can be a legitimate short-term tool, but the structure leaves little margin for error.