Merchant Cash Advance APR: How Does it Work?

Predictable revenue is the holy grail of business. However, this term is inherently misleading – overnight, everything can change. As the saying goes, “Everything is fine until it isn’t”.

From public health emergencies to unplanned street construction, your revenue well can run dry at a moment’s notice. When things like this happen, you can’t afford to wait weeks for an emergency loan. You need money ASAP.

Enter the merchant cash advance. Unlike traditional business loans, this product can get you desperately needed funding within 24 hours – or less. In this guide, we’ll educate you on all things cash advance, from the cash advance APR definition to the rates they charge.


What is a Merchant Cash Advance?

Often, finance commentators use the term “cash advance” and “business loan” interchangeably. This isn’t accurate, as cash advances are not loans by definition. Instead, a merchant cash advance is funding that’s fronted to businesses based on a percentage of their future revenues.

Unlike secured loans, cash advance vendors require no collateral. They aren’t like unsecured loans, either. Even if the borrower has bad/no credit, they can still get access to merchant cash advances.

If merchants can provide reasonable proof of future revenues, they qualify for an advance payment. Since cash advances aren’t loans, credit scores have much less importance.

How Do Cash Advances Work?

So, you’re interested in getting a cash advance. But how exactly does this financial product work? Start the process by finding American loan providers that offer cash advances.

On the homepage of, keep your eye on the ride sidebar and scroll down. When you reach the “Business Loan Uses” section, click on “Business Cash Advance in the US”. This page highlights private lenders who offer merchant cash advances.

Read each review and learn if cash advance is available at all, and what is the cash advance APR rate. Once you find a provider that’s best for you, click through to their site. Before starting the application process, gather together some key pieces of information. Requirements vary from one provider to the next, but generally, they include:

  • Tax returns
  • Credit card statements
  • Bank statements
  • Government-issued ID

Once a lender gets a clear picture of your monthly revenues, they’ll extend you an offer tailored to your business (and hence most lenders don’t charge a fixed cash advance APR but rather based on your level of risk). In this document, your lender will disclose the amount they’re willing to advance you, your payback schedule, and the holdback percentage.

The holdback percentage is the percentage of monthly sales payable to the lender. For instance, let’s assume your lender offers a monthly holdback of 15%. If you make $10,000, they take $1,500. If you make $5,000 the following month, their share drops to $750.

Sounds simple, right? It seems so, but, there’s another aspect of cash advances that catch many borrowers off-guard.


What Cash Advance Fees Can You Expect to Pay? What is the APR?

To make money on cash advances, lenders charge an APR. What is the cash advance APR definition? APR stands for “annual percentage rate”. In the context of finance, APR is the interest charged on a loan (or, in this case, a cash advance) every year.

Let’s say you request an advance of $10,000. If your cash advance has an APR of 10%, you’ll pay $1,000 in interest over 12 months. That sounds like a lot – and it is. Unfortunately, the cash advance APR of many lenders is much higher than that. After surveying the market, we found rates from 40% to 350%.

As you already know, lenders base cash advance repayment on a percentage of monthly sales. To make money, though, they charge a factor rate on your cash advance. For example, let’s assume your lender assesses a factor rate of 1.4 (or an APR of 40%). Using the advance requested earlier, you’d have to repay $14,000.

Here’s the problem – the APR mentioned above assumes you’ll take 12 months to repay your advance. However, since the percentage of sales taken from your account is static, any increase in business can cause your cash advance APR to soar. Under this schedule, monthly sales of just under $8,000 will keep you close to the “promised” 40% APR.

However, let’s assume the crisis affecting your business clears up quickly. Because of this, your enterprise averages sales of $10,000 every month. Because of this, you end up sending $1,500 monthly to the lender, per the holdback percentage of 15%. At this rate, you’d pay back your loan in the 10th month.

That sounds good but remember – the interest amount is static. No matter how quickly you pay off the above advance, the lender still gets their $4,000. In the example we gave, your effective APR would be around 48%.

The higher the starting APR, and the faster you repay your loan, the worse things can get. In some cases, your effective cash advance APR can soar into the triple digits.


Are Cash Advances Right For You?

For desperate businesses and individuals, cash advances are a tempting solution. Their lack of barriers and speedy approvals are a big reason why so many people seek them out. But, their massive APRs can cause borrowers to pay far too much in interest charges.

It’s true that cash advances scale their payments to sales. Even so, they may remove more revenue than a business can afford. Consequently, this can start a vicious cycle where businesses/individuals take out additional advances to stay afloat.

Often, these parties can seek traditional loans. They can be hard to find, but the repayment terms are almost always friendlier than cash advances. And then, there are unconventional sources of finances like crowdsourcing.

If you foresee an extended period where sales will be low, a cash advance may make sense. But, if your crisis will likely end in the short-term, seek alternative sources of financing.

Be Prepared For the Worst

Cash flow crises can strike at any time. If you need money fast, or if you don’t qualify for traditional loans, merchant cash advances are a potential solution. However, do ensure you’ve exhausted all other alternatives, as cash advance APR can be costly.