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Merchant Cash Advances vs. Debt Lending

Choosing the correct business financing option can be the difference between a company experiencing exponential growth or deadly stagnation. Making the correct choice has significant consequences, so it is imperative to understand what is available and the associated benefits and risks. A Merchant Cash Advance or MCA is a lesser-known financial tool that offers unique upside and risk. To understand MCAs in-depth, we will examine the option's mechanics, benefits, risks, and providers. We will also contrast MCAs with traditional debt lending to better understand how a business can maximize its growth potential while maintaining financial stability.

The Mechanics of Merchant Cash Advances (MCAs)

MCAs were once a niche financing option but have gained significant traction, specifically

among high-revenue generating businesses. At its core, an MCA offers businesses a lump-sum payment in exchange for a predetermined percentage of their future sales or receipts. Essentially, companies are leveraging their future revenue to obtain immediate capital.

The eligibility criteria for MCAs are relatively lenient, making it feasible for businesses with less-than-stellar credit to get approved. This model's allure lies in its simplicity and speed, providing companies with immediate access to capital. It's important to note that an MCA is not a traditional business loan and, as such, operates through a different process.

Merchant Cash Advance Step-by-Step

Application and Approval: After filling out an application with an MCA provider, a business owner submits several months of bank and credit card sales statements. These records allow the MCA provider to gauge the business's monthly sales and determine a suitable advance amount. Upon review, the provider presents an offer outlining the advance amount, factor rate, and retrieval rate. If the terms are agreeable, the business owner signs the MCA agreement, ensuring they fully comprehend the stipulated conditions. MCAs have a high approval rate compared to other business loans. The data below describes financing approval rates for businesses according to a 2023 report from the Federal Reserve:

  • MCAs: 90%

  • Equipment loans: 87%

  • Business line of credit: 76%

  • Business loan: 66%

  • SBA loan or line of credit: 64%

Receiving the Cash: Once an agreement is reached between a business and the financing company regarding the required amount, the funds are transferred to the business's bank account.

Charging Fees: Unlike traditional loans that come with an interest rate, MCAs use a factor rate. This rate is multiplied by the total advance amount to determine the repayment. For instance, if a business receives a $100,000 advance with a factor rate of 1.2, the full repayment would amount to $120,000.

Repayment Based on Sales: The repayment process for MCAs is typically daily, although some offer weekly repayments. The advance is repaid once the borrowed amount, the factor rate, and any additional fees are covered. Because daily or weekly repayment is required, non-cash businesses that rely on credit or debit card transactions are best suited.

Refinancing: Some MCAs offer refinancing options, allowing businesses to extend their repayment terms. However, refinancing can lead to additional costs, as companies might end up paying interest on the initial advance borrowed amount and fees.


MCA's Two Primary Repayment Structures

Percentage of Sales: Most MCAs determine repayments as a percentage of the business's credit or debit card sales, known as a holdback. These holdbacks typically range between 10% to 20% of sales revenue. Given that repayments are based on a percentage, the exact amount repaid fluctuates based on sales.

Consider a $100,000 cash advance with a factor rate of 1.2. Factor rates are the number by which the borrowed amount is multiplied to determine the total repayment. In this case, a 1.2 factor rate leads to a total borrowing cost of $120,000. If a business generates $5,000 in weekly sales and commits 10% of weekly revenue towards the advance, it would take approximately 40 weeks to repay the advance in full.

Fixed Withdrawals: Some MCAs opt for fixed withdrawals from the business's bank account, either daily or weekly. This method is akin to a conventional business loan, where the repayment amount is predetermined based on estimated monthly sales.

Rates and Fees Associated with MCAs

The repayment schedule is reasonably straightforward, but MCAs come with various additional fees which businesses need to understand:

  • Origination Fee: This fee is a percentage of the borrowed amount and is common to many business loans.

  • Underwriting or Funding Fee: This fee is charged for processing the financing application and can either be a percentage of the borrowed amount or a flat fee.

  • Administrative Fee: This fee covers the costs of processing or maintaining the MCA agreement.

Risks Associated with MCAs

Merchant Cash Advances (MCAs) have become a popular financing option for many businesses, especially those seeking quick access to capital. While they can be beneficial in certain situations, it is essential to understand the potential risks associated with:

  1. High Costs: MCAs often come with higher costs compared to traditional loans. The factor rate, which determines the total amount to be repaid, can translate to an annual percentage rate (APR) that is significantly higher than other financing options.

  2. Daily Deductions: MCAs typically require daily or weekly repayments directly deducted from the business's sales. This frequent deduction can strain a business's cash flow, especially during periods of lower sales.

  3. Over-leveraging: The ease of obtaining MCAs can tempt businesses to take on multiple advances. This can lead to over-leveraging, where a significant portion of daily sales goes towards repayments, leaving little for operational overhead.

  4. Potential Debt Spirals: If a business struggles with the repayments of one MCA, it might be tempted to take another MCA to cover the costs, leading to a dangerous cycle of accumulating debt.

  5. Loss of Control: Some MCA agreements include terms that dictate how the funds are used or require businesses to switch payment processors, leading to potential disruptions.

  6. No Benefit to Credit Score: Unlike traditional loans, where timely repayments can boost a business's credit score, MCAs have this benefit since they're structured as sales and not loans.

  7. Lack of Regulation: MCAs are not subject to the same regulations as traditional loans. This means businesses might not have the same protections and could face terms that are unfavorable or predatory.

Risks Exacerbated by Absence of UCC Filings

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The Uniform Commercial Code (UCC) filings are pivotal in ensuring transparency in business financing, acting as a public declaration of a lender's claim over a debtor's assets. This clarity aids lenders in gauging a business's existing financial commitments and the associated lending risks.

Merchant Cash Advance providers typically bypass UCC filings. This is because MCAs are framed as future receivables sales rather than traditional loans, implying that MCA providers don't technically hold a security interest in the business's assets.

For businesses, the absence of UCC filings can be a double-edged sword. On one hand, it offers the allure of easy access to multiple financing sources. Conversely, it can inadvertently push them into a perilous debt cycle, straining their cash flows and hampering growth prospects.

Furthermore, other lenders might be unaware of a business's multiple MCA commitments due to missing UCC filings. If the lender does not conduct due diligence, they might inadvertently compound the business's debt obligations, escalating the risk of default.

While MCAs offer quick capital access, the lack of UCC filings can mislead businesses into accumulating multiple MCAs, potentially leading to over-leveraging. This scenario can spiral into a situation where businesses grapple with repayments, endangering their financial stability.

The Rise of MCA Providers

Becoming a Merchant Cash Advance (MCA) provider requires a significant capital reserve and proper business registration. While the MCA sector is less regulated than traditional lending, providers must navigate the legal landscape, establish clear underwriting criteria, and invest in technology for streamlined operations. Ethical operations, transparency, client repayment monitoring, and staying updated with industry trends are crucial for long-term success and trustworthiness in the MCA industry. stands out as a modern MCA provider operating as a growth partner for e-commerce businesses. They offer a quick application process, with companies potentially receiving funding offers within 48 hours. Their tailored approach allows businesses to compare multiple offers and select the one that aligns with their growth needs. offers customizable funding schedules, transparent fee structures, and unrestricted funding use, unlike other platforms. They provide on-demand working capital of up to $5,000,000, which can be used for inventory, marketing, and payroll needs. Their transparent fee structure ensures no hidden costs, making them a reliable choice for e-commerce brands.

Shopify Capital is another example of an MCA provider who streamlined the MCA process. They target companies using the Shopify eCommerce technology, allowing for greater transparency and seamless repayment monitoring than other MCA providers might experience. Because they work with companies on their own platform, Shopify Capital can decrease their risk profiles and offer premium holdback rates of around 10%.

It's worth noting that MCAs can be more expensive than other business financing options due to the factor rates. Referencing the previous hypothetical example, a $100,000 cash advance with a factor rate of 1.2 and a 40-week repayment term equates to an annual interest rate of 26%. In comparison, a short-term loan of the same amount with a 26% APR for one year would offer more extended repayment terms and potentially lower borrowing costs.

The Case for Debt Lending

Many are familiar with traditional equity financing, where investors infuse capital into a company in return for an ownership percentage. However, debt lending offers an alternative where businesses can secure funds without diluting ownership. They borrow money and commit to repaying it with interest over an agreed period. Banks have primarily served this function, but other non-banking entities like Star Strong Capital have emerged.


Star Strong Capital (SSC) exemplifies the new wave of debt lenders who prioritize a holistic understanding of businesses. Beyond crunching numbers, they invest time in understanding the people steering the businesses, ensuring a synergy of values, aspirations, and goals. When juxtaposing MCAs and debt lending, several facets warrant consideration:

Cost Implications: MCAs, while easy to secure, often come with a hefty price tag, especially when you factor in the percentage of revenue they claim. Debt lending, especially with entities like SSC, can offer competitive interest rates, potentially translating to significant savings over the loan's lifespan.

Long-term Costs: The cumulative cost of an MCA can, over time, eclipse the cost of a traditional loan. This is especially true when considering the daily sales percentages claimed by MCAs, which can significantly erode a business's net revenue.

Referencing the $100,000 example, we can examine how SSC might approach the financing. The traditional APR (Annual Percentage Rate) on a short-term, 1-year business loan of $100,000 for a company with decent credit can vary widely based on several factors, including the business industry, the company's overall financial health, and the current economic climate. However, as a general guideline, the APR might range from 4% to 20% for a company with decent credit. Notably, these rates can fluctuate, but even on the high end, 20% APR is less than 26% APR, which was made clear in the MCA hypothetical example earlier.

Flexibility and Terms: The variable nature of MCAs, where repayments fluctuate based on sales, can introduce unpredictability into a business's financial planning. In contrast, debt lending typically offers fixed repayment schedules, bestowing businesses with the predictability that provides stability. Furthermore, debt lenders like SSC are willing to work with companies when unexpected shocks could push a company to default.

SSC's commitment to businesses transcends traditional lender-borrower dynamics. Their collaboration with a corporate gifting company that faced dire inventory challenges due to a delayed contract payment is a testament to this. Rather than pressing for immediate repayment and imposing punitive measures, SSC showcased flexibility by restructuring the loan, thereby providing the breathing space the company desperately needed.

Looking for Financing? Which Should You Choose?

In the dance of business financing, making an informed choice is paramount. While MCAs offer quick capital, their long-term implications can be daunting. On the other hand, debt lending, especially when partnered with entities like SSC, can provide the financial stability and predictability businesses often seek. The critical factor here, most likely, is a company's financial health. The best approach would be first to evaluate whether debt financing is an option for your company. For that, contact Star Strong Capital. Based on your conversation with the team, it could be evident that a Merchant Cash Advance is the best choice. If so, is an excellent option.

The performance quoted represents past performance. Past performance does not guarantee future results.

Not all investments made by Star Strong Capital LLC should be expected to be profitable.

The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions based on such investors’ own review of publicly available information and should not rely on the information contained herein.



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