Merchant Cash Advances: An Entrepreneur’s Friend or Foe?

Introduction – Startup Funding Basics

Since the beginning of the COVID-19 pandemic, startup activity has skyrocketed within the United States.[1] In 2025 alone, over 5.1 million entrepreneurs took the leap from business idea to formation.[2] Yet, despite this trend, only roughly 70% of new businesses survive beyond two years of formation and only 50% of businesses survive beyond five years.[3] Even those startups that are “VC-backed,” often indicating perceived high growth potential, [4] still fail roughly 75% of the time.[5] Among the many challenges for aspiring entrepreneurs and startup ventures, obtaining adequate funding is at the forefront.[6] Indeed, in a survey of 150 startup founders, 38% claimed that inadequate funding was the primary reason for struggling.[7] 

There are several typical ways to fund a startup venture. First, a business might seek to self-fund or “bootstrap,” which can take the form of turning to savings accounts, tapping into a 401(k), or reaching out to family and friends.[8] Alternatively, a business may seek funding from investors, which typically requires giving up ownership in the business in exchange for funding.[9] Next, a business could rely on crowdfunding, whereby a large number of individuals typically invest smaller amounts of money, often with no expectation of ownership or repayment, but rather for some form of benefit when the business launches.[10] Finally, a business may seek a small business loan, often offered by banks and credit unions.[11]

While these options suggest that a startup business can easily obtain necessary funding, it is often easier said than done.[12] For example, many startup founders may not have the personal means to “bootstrap,” or may be starting a business in a capital intensive industry where bootstrapping is not feasible.[13] Some entrepreneurs also might not be comfortable ceding control or ownership over their business to outsiders, making funding from investors undesirable.[14] As for seeking more traditional loans, as local banks are being folded into larger national financial institutions, it is becoming more difficult for small businesses to attract the attention and necessary funding from such resources.[15]

The Rise of the Merchant Cash Advance

A recent trend in response to the growing difficulties with obtaining funding is to seek a merchant cash advance (MCA).[16] An MCA is a type of funding that offers a business a lump sum payment in exchange for a percentage of the business’s future sales.[17] Generally, MCA providers will either “holdback” a portion (typically 10% to 20%) of the business’s debit or credit card sales on a daily or weekly basis until the advance is fully paid back or will take fixed daily or weekly withdrawals based on estimated monthly sales.[18] 

Unlike typical loans, MCAs are not tied to interest rates.[19] Instead, providers use what is known as a “factor rate” that typically varies between 1.1 and 1.5 and is multiplied by the initial advance amount to determine the total amount owed by the business.[20] For example, a business receiving a $100,000 MCA with a 1.5 multiplier would result in that business owing $150,000, regardless of how quickly the advance is paid back.[21] This is contrasted with typical loans tied to interest rates, whereby as the principal balance is paid back, the corresponding interest payments on the loan are reduced.[22]

MCAs – Advance with Caution

In a crisis or when a business is in dire need of an injection of cash, it is understandable why some entrepreneurs would resort to an MCA.[23] MCAs providers often furnish payment within 48 hours and without considerable investigation into credit history.[24] In 2024, 58% of MCA applicants received at least partial funding, while only 30% of small business loan applicants received funding.[25] Equally enticing, MCA providers typically do not require collateral, often making this option appear less risky than a typical loan.[26] Yet, despite the appeal of MCAs, startups and other small business should proceed with caution for several reasons.[27]

First, as illustrated by the example above, MCAs are one of the most expensive forms of funding for a business—often far more costly than a typical loan tied to interest rates.[28] For context, MCA factor rates equate to annual percentage rates (APR)—the metric associated with typical loans and which accounts for a loan’s interest rate plus fees[29]—between 35% and 350%.[30] Conversely, in the third quarter of 2025, the average small business loan issued by banks had an interest rate between 6.3% and 11.5%.[31] Once encumbered by an MCA, it can become difficult for businesses to climb out of such debt, with many business often taking on subsequent MCAs simply to pay off earlier MCAs.[32] Exacerbating this problem, the Small Business Administration recently modified its lending practices to prohibit issuing loans for refinancing MCA debt.[33]

Second, MCAs are ripe for predatory and abusive practices among providers.[34] Because MCAs are technically not considered loans, but rather purchases of future credit card receivable revenues, they generally fall outside the scope of most lending laws.[35] For example, in many states, MCAs are not governed by usury laws—laws that place caps on loan interest rates[36]—allowing providers to charge exorbitant factor rates that typical loan providers would be barred from charging.[37] Likewise, federal laws such as the Truth in Lending Act, which requires lenders to disclose information about fees associated with loans,[38] thereby protecting borrowers from predatory or unethical lending, also do not apply to MCAs.[39] 

To be sure, some states (e.g., Texas) now require MCA providers to register with a state consumer commission and offer more transparent disclosures regarding the structure of the MCA offered,[40] while other states like California have given state agencies the power to punish abusive MCA practices.[41] Yet still, the majority of state and federal regulatory agencies have not substantially addressed the MCA market.[42] It also does not appear that the federal government will likely provide any beneficial regulations in the near future, as the Consumer Financial Protection Bureau under the Trump Administration recently proposed new measures that would exclude MCA providers from reporting any data on their small business borrowers, further exacerbating the opaqueness of the MCA market.[43] Accordingly, despite the potential appeal of seeking an MCA, especially when cash flow is necessary to survive, small businesses and other entrepreneurs should remain wary of obtaining funding through these means.[44]

[1] See How Many New Businesses Are Started Each Year? 2026 Data Reveals the Answer, Com. Inst., https://www.commerceinstitute.com/new-businesses-started-every-year/ (last visited Feb. 23, 2026).

[2] See id.  

[3] See id. 

[4] See Jake Safane, What Does VC-Backed Company Mean?, Forge, https://forgeglobal.com/insights/glossary/vc-backed-company/ (last visited Feb. 23, 2026).

[5] See Elizabeth Pollman, Startup Failure, Harv. L. Sch. F. on Corp. Governance (Sep. 29, 2023), https://corpgov.law.harvard.edu/2023/09/29/startup-failure/.

[6] See Emily Heaslip, Reasons Why Small Businesses Fail and How to Avoid Them, U.S. Chamber Com. (May 15, 2025), https://www.uschamber.com/co/start/strategy/why-small-businesses-fail (describing “cash flow problems,” including lack of funding as a primary challenge for businesses).

[7] See Phil Santoro & David Kolodny, Why Startups Fail | Lessons from 150 Founders, Wilbur Labs (Nov. 8, 2023), https://www.wilburlabs.com/blueprints/why-startups-fail.

[8] See Fund Your Business, U.S. Small Bus. Admin., https://www.sba.gov/business-guide/plan-your-business/fund-your-business (Nov. 13, 2024) (discussing the various ways a small business may fund itself).

[9] See id.

[10] See Guide to Crowdfunding Your Startup, J.P. Morgan (Mar. 24, 2025), https://www.jpmorgan.com/insights/business-planning/crowdfunding-a-startup-types-strategies-and-benefits.

[11] See Fund Your Business, supra note 8.

[12] See generally Heaslip, supra note 6 (noting cash flow and funding problems as one of the most significant challenges businesses face).

[13] See Bootstrapping Your Startup Business, J.P. Morgan (Oct. 6, 2025), https://www.jpmorgan.com/insights/business-planning/bootstrapping-your-startup-a-business-guide-for-entrepreneurs.

[14] See generally Noam Wasserman, The Founder’s Dilemma, Harv. Bus. Rev., Feb. 2008 (explaining the dilemma many business founders face between being “king” by retaining full control or being “rich” by ceding control to investors).

[15] See Alina Selyukh & Scott Horsley, A Shadowy Industry Is Helping Small Businesses Pay Tariffs –– At a High Cost, NPR (Feb. 9, 2026, at 5:00 ET), https://www.npr.org/2026/02/09/nx-s1-5628425/shark-tank-tariffs-loans-cash-advance.

[16] See id. (describing MCAs as “[a] fast fix where banks stay away” (emphasis omitted)).

[17] See Bob Haegele, What Is a Merchant Cash Advance?, Wall St. J.: Buy Side,  https://www.wsj.com/buyside/personal-finance/business-loans/merchant-cash-advance (Oct. 21, 2025, at 15:46 ET).

[18] See Olivia Chen, What Is a Merchant Cash Advance?, Bankrate (Aug. 26, 2025), https://www.bankrate.com/loans/small-business/what-is-a-merchant-cash-advance/#repayment.

[19] See Haegele, supra note 17.

[20] See Mikal Krueger, The Dangers of a Merchant Cash Advance, McConville Considine Cooman & Morin, P.C., https://www.mccmlaw.com/news-and-articles/articles/the-dangers-of-a-merchant-cash-advance (last visited Feb. 23, 2026).

[21] See id. (describing a similar hypothetical).  

[22] See Marlese Lessing, What Is a Factor Rate and How to Calculate It, Bankrate (Aug. 27, 2025), https://www.bankrate.com/loans/small-business/factor-rate/#what-is.

[23] See Selyukh & Horsley, supra note 15 (providing an example of a small business owner resorting to an MCA and noting “[h]owever shady the source, fast access to cash is enticing in a crisis”).

[24] See Chen, supra note 18 (describing the pros and cons of MCAs).

[25] See id.

[26] See Krueger, supra note 20.

[27] See generally id. (outlining the various risks associated with MCAs).

[28] See id. (discussing the “astronomical costs” associated with MCAs, that would reflect interest rate percentages in the “hundreds if not thousands”).

[29] See What is the Difference Between a Loan Interest Rate and the APR?, Consumer Fin. Prot. Bureau (Jan. 30, 2024),  https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-loan-interest-rate-and-the-apr-en-733/.

[30] See Bankruptcy In Sight: What the Heck is an MCA and Why Should I Care?, Perkins Thompson (Aug. 25, 2025), https://perkinsthompson.com/bankruptcy-in-sight-what-the-heck-is-an-mca-and-why-should-i-care.

[31] See Randa Kriss & Sally Lauckner, Average Business Loan Rate: What to Know About Interest Costs, NerdWallet (Mar. 3, 2026), https://www.nerdwallet.com/business/loans/learn/rates-fees.

[32] See Selyukh & Horsley, supra note 15 (“A business that takes out one MCA tends to not stop at one, borrowing more to repay the original lender.”).

[33] See Tim Anderson, MCA Debt & SBA Loans: Understanding Your Options Under SOP 50 10 8, Windsor Advantage (July 23, 2025), https://windsoradvantage.com/news/mca-debt-sba-loans-understanding-your-options-under-sop-50-10-8.

[34] See Selyukh & Horsley, supra note 15 (describing MCA lending as “[a]n unregulated ‘deep, dark well’” and noting that predatory lenders and loan sharks often provide MCAs (emphasis omitted)).

[35] See Frequently Asked Questions, Grant Phillips Law PLLC, https://grantphillipslaw.com/merchant-cash-advance-faq/ (last visited Feb. 23, 2026).

[36] See Will Kenton, What Are Usury Laws?, Investopedia (Jan. 16. 2024), https://www.investopedia.com/terms/u/usury-laws.asp.

[37] See Frequently Asked Questions, supra note 35.  

[38] See Truth in Lending Act, FTC, https://www.ftc.gov/legal-library/browse/statutes/truth-lending-act (last visited Feb. 24, 2026).

[39] See Update on Merchant Cash Advances: Quick Money Paybacks Are Still Hell, Branson Ainsworth (Mar. 17, 2025), https://www.bransonlaw.com/blog/update-on-merchant-cash-advances-quick-money-paybacks-are-still-hell.

[40] See Daniel B. Pearson & Eric T. Mitzenmacher, Texas Commercial Financing Disclosure and Registration Law Threatens Sales-Based Financing Industry, Mayer Brown (June 30, 2025), https://www.mayerbrown.com/en/insights/publications/2025/06/texas-commercial-financing-disclosure-and-registration-law-threatens-sales-based-financing-industry.

[41] See Selyukh & Horsley, supra note 15 (noting various state efforts to regulate MCAs).

[42] See id. (“Because these cash advances aren’t classified as loans, most lending laws don’t apply. The lenders aren’t required to be licensed. The fees they can charge have no legal cap.”).

[43] See Small Business Lending Under the Equal Credit Opportunity Act (Regulation B), 90 Fed. Reg. 50952 (proposed Nov. 13, 2025) (to be codified at 12 C.F.R. pt. 1002).

[44] See generally Krueger, supra note 20 (outlining the various risks associated with MCAs).