Is a merchant cash advance right for my ecommerce company?

Ecommerce startups often face supply chain costs long before they can recoup their investment through product sales. This timing gap is known as the cash conversion cycle — and it can strain a company’s finances, limiting its ability to invest in growth while keeping inventory in stock. To address this cash crunch, short-term financing becomes a critical tool for founders looking to bridge the gap between expenses and revenue. One option is a merchant cash advance (MCA). 

An MCA gives your ecommerce company a lump sum of capital based on previous and projected credit and debit card sales. Repayment happens automatically, using a fixed percentage of daily or weekly sales — known as the “holdback” — that is deducted through ACH withdrawals or split directly from credit card sales through a payment processor. The advance continues until the full amount is repaid at a multiple (often 1.1x to 1.5x) of the original loan value, called the “factor rate.” 

MCAs can seem attractive because repayment flexes with your business's cash flow, adjusting automatically to your revenue levels. For example, when sales dip, repayment amounts scale down to match. 

However, the factor rate, plus additional fees, can make this one of the more expensive financing choices compared to alternatives like working capital loans, inventory financing, or credit cards.  

The key difference between MCAs and traditional working capital loans comes down to borrowing costs. An MCA’s factor rate — for example, $1.30 for every $1 borrowed — may look straightforward, but the total borrowing cost is often higher than what you’d face with a working capital loan at a fixed APR. 

In addition to the factor rate, you might also encounter extra loan fees, including: 

• Underwriting fee: Charged for evaluating your business's credit card sales and risk profile before issuing the advance. Often bundled with the origination fee.
• Origination fee: A processing fee (1-5%) charged for processing and setting up the advance.
• Funding fee: A fee for transferring the lump sum advance to your account.
• Administrative and servicing fee: Ongoing charges for managing the account and repayments.

In total, the final cost of an MCA — especially with a short payback period — can translate to an extraordinarily high implied APR, whereas the all-in cost of a working capital loan may come in lower.

MCAs are accessible to businesses of nearly any size or age — which is why they’re common across the ecommerce industry. That said, lenders typically look for the following characteristics when evaluating your application:

1. At least 6–12 months of operating history.
2. Minimum monthly revenue, often $5,000–$10,000 in credit card sales.
3. Consistent, sufficient volume of credit or debit card transactions.
4. An active business bank account (required for deposits and repayments).
5. A fair credit score can help, even though MCAs are more flexible on credit requirements.
6. Restrictions may apply by industry — for example, businesses selling age-restricted products like nicotine or adult content may be excluded.

Exact requirements vary between MCA providers, so it’s important to confirm criteria with each one.

While MCAs often come with higher borrowing costs, they also carry several advantages — which is why the market is projected to reach a $20B global industry in 2025. In addition to flexible, revenue-based repayment terms, MCAs offer borrowers:

• High approval rates: Approval rates are generally higher than traditional working capital loans because they rely on future sales, not just credit scores. 
• Faster, simpler approvals: The process is more straightforward than alternative financing, with less documentation and fewer credit checks — meaning approvals can happen within days. 
• No collateral required: Unlike many loan products, MCAs don’t require collateral, making them appealing to startups without substantial assets. 
• Minimal credit score impact: Since approval is tied to sales performance rather than credit history, companies can secure capital without hurting their credit rating.

While MCAs can provide fast cash for short-term needs, they may not always be the best fit. Common drawbacks include:

• High costs: MCAs can be significantly more expensive than traditional loans, due to high factor rates and layered fees. 
• Lack of regulation: Because MCAs are less regulated than traditional loans,  terms can be less favorable and protections weaker — leaving room for  unclear conditions or predatory practices.
• Short repayment periods: Repayment windows are usually just a few months, which means large daily deductions from sales. This can create serious pressure on cash flow.
• Risk of debt cycles: The high cost and short repayment period can force companies to take out another advance soon after repaying the first. This cycle of borrowing to cover cash gaps can quickly lead to mounting debt and financial instability. 

As you’re considering whether an MCA is right for your business, it’s worth considering other financing options. 

Here are some of the most common sources founders use either alongside or instead of an MCA:

Business lines of credit

These provide flexible funding that businesses can draw on as needed, up to a set limit. Borrowers pay interest only on the amount used. The tradeoff: they often require strong credit and can be reduced or revoked during tighter economic conditions.

Working capital (short-term) loans

Working capital loans provide lump-sum funding for daily operations. They typically carry lower interest rates than MCAs, but their fixed repayment schedules can strain cash flow if revenue slows.

Long-term loans

Term loans provide a fixed amount of funding with set repayment terms and interest rates. They’re well-suited for large, long-term investments. The tradeoff:  they can be harder to qualify for and lock a business into longer repayment commitments.

Invoice financing

This option lets businesses borrow against outstanding invoices, giving immediate cash flow while waiting on customer payments. Often cheaper than MCAs, invoice financing helps companies with slow-paying clients maintain liquidity without taking on high-interest debt.

Recurring revenue financing

Recurring revenue financing leverages future subscription or membership payments to secure funding. This type of financing is often more affordable than MCAs and aligns repayment schedules with predictable revenue streams. 

Trade credit

Trade credit lets businesses purchase goods and services on account, paying suppliers later. It can improve cash flow without upfront costs, but late payments risk damaging supplier relationships or triggering stricter terms.

Business credit cards

Business credit cards, such as the IO credit card, offer revolving credit while helping build credit history. They provide flexibility for everyday expenses, often at lower interest rates than MCAs, and can also deliver perks like cashback.

Inventory-based financing 

Inventory-based financing uses a company’s inventory to secure funding — often useful for retailers and ecommerce businesses. However, if sales are slow, the lender can claim the inventory, putting stock at risk.

MCAs play a crucial role in giving ecommerce businesses quick access to capital. They offer flexibility and high approval rates — but also come with high costs and potential cash flow strain. By first clarifying why you need financing, you’ll be better equipped to compare MCAs against alternatives and choose  the right funding for your business.

This article is for educational purposes only and should not replace professional business or financial advice. The information is general, may not be current, and is offered in good faith without warranties regarding its accuracy, adequacy, or completeness.