Merchant Cash Advance
Definition
A merchant cash advance is financing provided to a business in exchange for a right to collect a specified amount of future receivables. Instead of charging stated interest on a loan balance, MCA contracts often use a factor rate to determine the payback amount.
Why it matters
MCAs can generate attractive short-duration private credit yields, but performance depends on small-business cash flow, daily or weekly collections, underwriting discipline, and legal characterization. In note structures backed by MCA pools, investor risk is ultimately tied to merchant repayment behavior and servicer controls.
Common misconceptions
- •MCA factor rates are not APRs; effective APR depends on repayment speed.
- •Calling the contract a receivables purchase does not eliminate credit risk.
- •Collections can be frequent, but recoveries can still be weak after merchant failure.
Technical details
Factor-rate mechanics
If a merchant receives $100,000 at a 1.37x factor rate, expected payback is $137,000.
The apparent return depends on how quickly the $137,000 is collected.
Daily ACH collection creates fast amortization but can stress fragile borrowers.