Merchant cash advances: how they work and what they cost
Learn how a merchant cash advance works, how factor rates and holdbacks translate into cost, how it compares with revenue-based financing, and how platforms fund advances.
A merchant cash advance gives a business cash now in exchange for a share of its future sales. It is fast and flexible to repay, but its cost is easy to misread. This guide explains factor rates and holdbacks, compares advances with revenue-based financing and covers how platforms fund the advances they offer.
Merchant cash advances are common among restaurants, retailers and online sellers that take card payments. Many payment platforms and commerce software providers offer them to their merchants, since they already see the sales that will repay the advance.
How it works
The provider pays the merchant a lump sum. In return, it receives a fixed total, collected as a percentage of daily or weekly sales, called the holdback, until the amount is paid off. The total is set by a factor rate rather than an interest rate.
A simple example: a merchant receives a $50,000 advance with a factor rate of 1.3, so it owes $65,000. With a 10% holdback and $5,000 in daily card sales, the provider collects $500 a day, and the advance is repaid in about 130 days. If sales slow, repayment takes longer. These figures are illustrative, not typical terms.
Reading the cost
A factor rate looks like a flat fee, but the effective annual cost depends on time. In the example, the merchant pays $15,000 for roughly four months of capital. If strong sales repay the advance in 90 days, the same $15,000 covers a shorter period and the annualized cost rises.
Several US states, including California and New York, now require providers of commercial financing to disclose an estimated cost in a standard form before a merchant signs.
Merchant cash advance vs. revenue-based financing
| Merchant cash advance | Revenue-based financing | |
|---|---|---|
| Repaid from | A share of card or daily sales | A share of total revenue |
| Typical structure | Purchase of future receivables | Loan with a repayment cap |
| Typical users | Retailers, restaurants, online sellers | Software and ecommerce companies |
How platforms fund advances
A platform that offers advances to thousands of merchants needs capital to fund them. Most start with their own balance sheet, then add credit facilities from banks or private credit funds. Those facilities set how much the platform can advance, which merchants qualify and how often it can draw. See working capital loans for the terms that matter.
With stablecoins, a platform's facility can be drawn and repaid near-instantly, 24/7, and merchant repayments collected from daily sales can flow back to the lender on the same schedule. Each transfer can carry a reference to the advance it belongs to. The economics of the advance still depend on the lender, the platform's loss rates and the facility terms.
FAQ
Is a merchant cash advance a loan?
Usually it is structured as a purchase of future receivables rather than a loan, so it may not be regulated as one. Courts and regulators look at the substance of the agreement, and some US states require cost disclosures for commercial financing, including advances.
How do you calculate the cost of a merchant cash advance?
Multiply the advance by the factor rate to get the total repaid. The effective annual cost depends on how quickly the holdback repays that amount. Faster sales mean faster repayment and a higher annualized cost for the same factor rate.
What is the difference between a merchant cash advance and revenue-based financing?
Both are repaid as a share of revenue. A merchant cash advance is typically tied to card sales and structured as a purchase of receivables. Revenue-based financing is usually a loan repaid from a percentage of total revenue, often used by software and ecommerce companies.
Explore credit on Tempo
Stablecoins let credit move like a payment: funded, drawn and repaid at any hour, with each transfer tied to its loan. If you offer merchant advances or other financing to your customers, get in touch to see how that works on Tempo.