Cost of MCA Loans Compared to Alternative Funding Sources

Oct 14, 2019


Welcome to Advisor Research Partners, your trusted source for comprehensive consulting and analytical services in the business and consumer services industry. In this detailed analysis, we aim to shed light on the true cost of Merchant Cash Advance (MCA) loans when compared to alternative funding sources.

Understanding MCA Loans

MCA loans have gained popularity as a quick and convenient financing option for small businesses. However, it is crucial to thoroughly understand the associated costs and potential drawbacks before making a decision.

What is an MCA Loan?

An MCA loan is a type of financing where a business receives a lump sum in exchange for a percentage of their future sales or receivables. Unlike traditional loans, MCA loans may have higher interest rates and shorter repayment periods, making them an attractive option for businesses with immediate cash flow needs.

The True Cost of MCA Loans

While the convenience and accessibility of MCA loans are undeniable, it's essential to consider the true cost of this financing option.

Factor 1: Factor Rate

The factor rate determines the total repayment amount. It is typically a decimal figure ranging from 1.1 to 1.5, and it multiplies the borrowed amount to calculate the repayment total. Depending on the terms of the loan, this factor rate can significantly impact the overall cost of financing.

Factor 2: Holdback Percentage

Most MCA loans require daily or weekly repayments based on a holdback percentage. This percentage represents the share of your daily sales that will go towards repaying the loan. While it may seem convenient, it's crucial to consider the impact on your daily cash flow and overall profitability.

Factor 3: Additional Fees

Many MCA loans come with additional fees, such as closing fees, origination fees, and renewal fees. These fees can significantly increase the cost of borrowing, making it important to carefully examine the loan agreement before signing.

Comparing MCA Loans with Alternative Funding Sources

It is imperative to evaluate MCA loans against alternative funding sources to determine the best financing option for your business. Here, we delve into some popular alternatives:

1. Traditional Bank Loans

Traditional bank loans are often seen as a reliable and affordable choice for financing. They generally offer lower interest rates and longer repayment terms compared to MCA loans. However, banks often have strict eligibility requirements and a lengthy approval process, making them less suitable for businesses in need of immediate funding.

2. Small Business Administration (SBA) Loans

SBA loans provide government-backed financing options for small businesses. They offer competitive interest rates and longer repayment terms, making them an attractive alternative to MCA loans. However, the application process can be time-consuming, and meeting the necessary criteria can be challenging.

3. Business Lines of Credit

Business lines of credit offer flexibility and convenience similar to MCA loans. However, they usually come with lower interest rates and provide businesses with ongoing access to funds. This makes them a viable alternative for businesses with recurring financing needs.

4. Equipment Financing

For businesses looking to finance equipment purchases, equipment financing can be an excellent option. With this type of financing, the equipment itself serves as collateral, reducing the lender's risk and potentially leading to more favorable terms compared to MCA loans.


When comparing the cost of MCA loans to alternative funding sources, it is vital to consider the specific needs and circumstances of your business. While MCA loans offer immediate access to capital, the associated costs and repayment structure may not align with your long-term goals.

At Advisor Research Partners, our consulting and analytical services can guide you through this decision-making process. Contact us today to access comprehensive research and expert advice tailored to your business's unique requirements.

Maria Brown
Great comparison, very helpful! 💰🔀
Nov 8, 2023