The reason you feel you’re bleeding cash to that MCA is that the financing is taking your present and future and paying for yesterday. In some businesses, and restaurants come to mind, running on very little cash is normal. They run with negative working capital, that is, cash and inventory is less than what the business owes to vendors and employees in accrued wages. Sales produce cash every week and vendors extend credit terms, while employees are paid in arrears. So the lag between cash in the door and bills out the door is always there, and you can run that way most of the time. But if sales ever drop, those bills and payroll from the week before come due, and you’re suddenly out of cash. Selling tomorrow’s sales at a steep discount is a fast track to the poorhouse.
The Terms Are Steep
In an MCA, you sell a portion of your future sales to a finance company in exchange for a lump sum. You agree to pay back a larger sum straight out of your future credit and debit card receipts. It sounds straightforward, but the terms are steep. You give the MCA firm access to your bank account. It takes a percentage of your card receipts, plus fees, every day until it’s paid off.
A three-location restaurant was short $50,000 and it needed it to either pay off a large invoice or cover payroll. A merchant cash advance firm gave it $50,000, with a factor rate of 1.3. It would be paying back $65,000 over six months. Every dollar it received cost $1.30. Most MCA companies insist their products aren’t loans, but you pay back more than you received. In other words, you’ll be paying back an extra $15,000. That difference is interest. If the $65,000 is paid back evenly over a few months, the effective annual interest rate is around 100%. In most states a rate that high would be usurious. Then there are the brokers. It’s not unheard of for them to take a 10% to 15% cut of the amount funded, and origination and closing fees push the real cost even higher.
Some analysts call the MCA the business equivalent of a payday loan. Others call it last-resort financing. In spite of the cost, more struggling businesses are getting it. And the Business Research Company estimates that the market for it was roughly $20 billion in 2025. Restaurants are prime targets for it because they have so many debit and credit card transactions.
An MCA Is Draining Your Bank Account Every Day
An MCA is draining your bank account every day. The funder deducts a portion of your card sales before you can pay vendors and payroll. Take the 1.3 factor in the example. For every dollar they advanced you, you have to pay back $1.30 plus fees. The reason the withdrawals keep getting bigger? The advances get renewed again and again, like payday loans. Owners who are desperate sometimes stack several merchant cash advances on top of each other, and the cash flow you thought was going to payroll and vendors gets chewed up by daily debits from multiple funders hitting the account.
A second threat from an MCA is that it can also disrupt your existing credit agreement with your bank. Red Door Brands, a 31-unit franchisee for Del Taco, Little Caesars, Arby’s and McAlister’s, filed Chapter 11 in July after taking MCA advances totaling $2.7 million. It stacked 10 different advances from nine different MCA firms trying to stay afloat. Three of its Merchant Cash Advance providers - Apex Funding Silver LLC, Galt Funding and Mynt Advance - filed liens on its accounts that collect DoorDash payments. As a result, DoorDash and its payment processor, Stripe, refused to pay Red Door any more money until the liens were released. Meanwhile, Red Door’s own bank sued the company and nine of its MCA firms on August 8, asserting that it had a secured interest in the company’s cash collateral.
As the Red Door case illustrates, the risk is not just the daily debits. It’s the possibility that the funder could put a lien on an account that freezes the money your delivery and credit card platforms owe you. What’s more, your own bank might decide it also has a claim on that cash. If several funders and a bank all claim the same account, the owner may lose control of the business’s cash.
The Best Move Here Is to Stay Away
If you’re hoping an SBA loan will wipe out your merchant cash advance, you’ll be disappointed. As of June 1 the Small Business Administration says its loans cannot be used to pay off merchant cash advances. New SBA Standard Operating Procedures specify that MCAs and factoring agreements are not eligible for refinancing under its standard 7(a), 7(a) small loans or SBA Express loans.
Some state attorneys general have sued MCA companies and have argued the advances are loans disguised as sales that violate state usury laws. New York has recently barred one firm from making further advances. A few states require strict disclosures or licensing for MCA firms. Many states, however, have few regulations or very little oversight.
You should never renew an MCA. You should never stack another advance to cover the first. The promoters pitch MCA as an alternative form of financing that doesn’t dilute your ownership. But a business running on negative working capital that takes an MCA is rarely going to survive. The best move here is to stay away. If you’re already in one of these deals and it feels like you’re spinning and the net is closing, try to get help before you sign anything else.
