Education Library · Foundations · Article 9
A young home service company doing about $35,000 to $40,000 a month got a funding offer through its job management software. There was no interest rate, just a flat fee, and it would be paid back out of 17% of the company’s daily sales. The owner had a finance degree and still couldn’t work out what the money actually cost. His sales didn’t make it any easier: “some days it’s $8,000, some days it’s, you know, $1,000.”
That offer was a merchant cash advance, or MCA. MCAs and their close relatives, short-term loans with daily or weekly payments, are some of the most common financing in the trades and some of the hardest to price from the paperwork.
How the cost is set
An MCA is usually structured as a purchase of your future sales, not a loan, so it doesn’t come with an interest rate. It comes with a factor rate. Take a $50,000 advance at a 1.35 factor rate. You owe back $67,500. If there’s a 3% origination fee, $1,500 comes off the top and $48,500 lands in your account. Paid back over about six months of banking days, that’s roughly $536 coming out every business day.
A 1.35 factor rate sounds like 35%. It isn’t, for two reasons. Payments start almost immediately, so you only have the full amount for a day or two and only about half of it on average. And the cost is fixed no matter how fast it’s repaid. When you run the actual deposit and payment schedule through an APR calculation, the picture changes:
| Same $50,000 at 1.35, 3% fee | Daily payment | Approximate APR |
|---|---|---|
| Repaid over about 6 months | about $536 | about 140% |
| Repaid over about 3 months | about $1,071 | about 275% |
Short-term loans with daily or weekly payments work much the same way, even when written as true loans. Compare the total payback, the amount you actually receive and the APR, not the rate on the front page.
Holdbacks and daily debits
The 17% in the opening example is called a holdback, the share of sales that goes to repayment. Some MCAs take it straight out of card processing. Most of the offers trades owners see now take a fixed daily or weekly ACH debit from the bank account, set from an estimate of the holdback.
Many contracts include a reconciliation clause that lets you ask for payments to be adjusted if sales drop below the estimate. The process varies, so read that section before you sign.
Why owners take them
Speed and paperwork. An MCA can fund in days off a short application and a few months of bank statements. Approval leans on deposits, so an owner with damaged personal credit, a loss year or a recent bank decline can still get funded.
One remodeling company we spoke with showed $152,000 in net profit for the prior year and had $1.3 million in active jobs. The owners’ personal credit kept them out of a bank loan, so they had two advances running, one paid weekly and one daily. As one of them put it: “We don’t have a problem getting estimates. We don’t have a problem selling jobs.”
The cash flow drag
A $536 daily debit is about $2,700 a week and over $11,000 a month, coming out every banking day whether a job paid that week or not. Trades businesses get paid in lumps, on progress draws or 30 to 60 days out on commercial work. The debit doesn’t wait.
The cost also eats margin in a way that doesn’t show up on the job. If you sell work at 32% gross margin and pay for it with an advance, the margin you actually keep is lower once the cost of the money comes out. Paul Childers put it this way: “I like predictable money. Even if it’s a little bit more expensive, if it’s predictable, I’ll take it. Because I can at least control every variable around it.”
Stacking
Stacking means taking a second advance before the first is paid off, then a third. Each one adds its own daily or weekly debit. Many MCA contracts restrict or prohibit stacking, and many other funders, including factoring companies, won’t fund while advances already have a claim on the same receivables.
A commercial subcontracting contractor we talked to had “around 400k of MCAs kind of spread out on a couple different companies,” three providers in all, while waiting 45 to 60 days to get paid on large jobs. None of the payments had been missed. The timing just didn’t work.
Renewals
Providers often offer a renewal once an advance is about half paid. The new advance pays off what’s left on the old one, and you get the difference. Using the earlier example, with $33,750 still owed, a $60,000 renewal at 1.35 means you now owe $81,000. After paying off the old balance and a 3% fee, about $24,450 of new money reaches your account.
The old balance already had its cost built in, and unless the contract includes an early payoff discount, that cost usually isn’t reduced when the renewal pays it off. You’re paying a new factor rate on money that was already priced.
Refinancing out, and the SBA
The usual way out of MCAs is a longer-term loan with a fixed monthly payment. The SBA is generally not that loan. Since June 2025, SBA rules haven’t allowed loan proceeds to refinance an active merchant cash advance. The SBA updates these rules from time to time, and newer guidance may allow a narrow path for MCA debt that has already been converted into a regular term loan and paid on schedule for a long period, so ask the lender what the current rules allow. Outside the SBA, banks and credit unions set their own policies, and some will look at a refinance case by case.
Disclosure laws
Several states now require MCA and other commercial financing providers to put the cost in writing before you sign. New York requires disclosures, including an estimated APR, on commercial financing of $2.5 million or less. California requires similar disclosures, including APR, on financing of $500,000 or less. Utah, Virginia, Florida, Georgia, Connecticut, Kansas, Missouri and Texas have their own disclosure laws, and what they require varies.
Wherever you are, you can ask for the amount you’ll receive after fees, the total payback, the payment schedule, the prepayment terms, and whether there’s a personal guarantee or a lien on your receivables. Whether a specific contract is enforceable, or what your state requires, is a question for an attorney.
This article is educational and isn’t legal, tax, accounting or lending advice. Program rules, lender terms and credit bureau practices change, so verify current terms before acting.
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