Merchant cash advances (MCAs) and working capital loans offer short-term capital for your business. An MCA is a purchase of your future receivables in exchange for an upfront lump sum, with fixed daily or weekly remittances. A working capital loan provides funds to help run your business, with a clear repayment structure and timeline. Both financing options provide quick access to money that you can use for immediate needs, but the best choice depends on the nature of your business.
In this guide, we’ll explain the advantages of a merchant cash advance vs. a working capital loan, when each may be a better fit, and how to choose the right Credibly funding solution for your unique goals.
- A merchant cash advance is a purchase of future receivables for a lump sum paid upfront with fixed daily or weekly ACH remittances with the ability to reconcile monthly.
- A working capital loan is a short-term loan used to cover day-to-day operational costs, repaid with fixed installments.
- MCAs are typically used for urgent or high-ROI needs, while working capital loans cover short-term operational costs.
- Both provide same-day funding and flexible usage1.
What is a working capital loan?
A working capital loan, also called small business working capital financing, is a short-term financing option designed to help businesses cover day-to-day costs. “Working capital” simply means the amount of money your business has to cover short-term obligations. If your working capital is negative, a working capital loan helps bridge the gap. Businesses may use working capital loans to purchase inventory, cover payroll, or provide cash flow when things are slow.
The key advantages of a working capital loan are fast access to capital and flexible use of funds. If approved, a financing provider can often deposit a lump sum directly into the business bank account within 24 hours or less.
Unlike long-term loans, working capital financing doesn’t force businesses to take on years of debt. Funds received through a working capital loan are repaid through fixed daily or weekly payments over a set period at a fixed factor rate. The loan must be paid in full, and factor rates tend to be higher than interest rates for long-term loans. However, the repayment schedule is established upfront (typically between 6 and 24 months), allowing small business owners to budget for a predictable expense.
Working capital financing is best for businesses that need cash now, but have steady revenue and the ability to make regular repayments. Since working capital loans for small businesses are often unsecured, businesses that have been turned down by traditional banks may still qualify.
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What is a merchant cash advance?
A merchant cash advance provides businesses with quick access to capital by offering a lump sum upfront. It’s not a loan, but a purchase of future receivables. Cash is deposited directly into your business bank account and is typically available for use within hours of approval.
MCA funding is very flexible. Quick access lets business owners use the money for a wide variety of needs, such as an immediate marketing push, snagging an unmissable deal on inventory, emergency equipment repairs, or covering expenses during the off-season.
Unlike bank loans, MCAs are not remitted in monthly installments. Instead, the business remits a fixed daily or weekly amount via automated clearing house (ACH) transfer. The remittance amount is based on actual reported revenue and determined at approval.
MCAs do not accrue interest. Instead, business owners remit a factor rate of the initial funding amount. For instance, with a factor rate of 1.30, your business remits $1.30 for every $1.00 in funding. Factor rates let small business owners see the total cost of funding upfront, without calculating months or years’ worth of interest.
Merchant cash advances for small businesses are based on revenue, not a credit report, and no collateral beyond future receivables is required. However, a performance guaranty can be invoked if you commit fraud or attempt to hide future revenues — so don’t do that.
MCAs are often available even if the business does not qualify for traditional loans. Since MCAs can cost more than other financing options, they’re typically recommended for high-ROI scenarios and businesses with seasonal fluctuations or unpredictable cash flow.
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MCA vs. working capital loan: Key differences
Comparing the benefits of a working capital loan vs. an MCA can help you determine which presents the best option for your business:
Comparing merchant cash advances vs. working capital loans
| Feature | Merchant cash advance (MCA) | Working capital loan |
| Remittance/payment schedule | Fixed daily or weekly ACH transfer based on revenue at approval; 3–24 months1 | Fixed daily or weekly payments; 6–24 months1 |
| Remittance/payment options |
Reconciliation: Retroactive credit to cover an over-remittance. Modification: Temporary, proactive adjustment of future remittances. |
Modification: Temporary, proactive adjustment of future payments. |
| Qualification requirements | 6+ months in business, $20K avg. monthly deposits, 550+ FICO | 6+ months in business, $20K avg. monthly deposits, 550+ FICO |
| Funds available | As fast as 4 hours after approval1 | As fast as 4 hours after approval1 |
| Best for | High-ROI opportunities for businesses with fluctuating sales. | Covering immediate expenses for businesses with predictable cash flow. |
| Collateral | Future receivables (no hard collateral required) | No collateral required for unsecured loans |
| Discounts | Credibly Early Remittance Discount: When a merchant remits their full outstanding balance in a single lump sum, Credibly can reduce the factor (cost) component of the Amount Sold by 20%.3 | Credibly Prepayment Discount: When a merchant pays their full outstanding balance in a single lump sum, Credibly can reduce the factor (cost) component by 20%.3 |
Which option is better for businesses with steady revenue?
Businesses with consistent revenue often benefit more from a working capital loan vs. an MCA. If your cash flow falters, a working capital loan lets you cover short-term, predictable expenses like payroll, rent, utilities, or inventory, then repay the loan on a fixed schedule.
Which option is better for seasonal businesses?
If your business is seasonal, you may prefer a merchant cash advance vs. a business loan. With remittances based on your revenue at approval, an MCA through Credibly offers retroactive reconciliation and proactive modification5 to help you cover remittances during slow periods.
Which option is faster: a working capital loan or an MCA?
Both MCAs and working capital loans offer quick access to cash. In many cases, businesses can be approved for either option in as little as 2 hours and access their funds in as little as 4 hours.
When a working capital loan may be the better fit
A working capital loan for your small business makes the most sense if you have steady revenue and a clear plan for using the funds. With daily or weekly payments over 6 to 24 months, you can get the money you need today without taking on years of debt or remitting a portion of your revenue.
For example, an auto repair shop has recently had to replace several aging lifts, leaving a shortfall in the payroll budget. If the shop has consistent revenue, a working capital loan provides the cash needed to get the new equipment installed and pay the employees on time.
When choosing a working capital loan, make sure you have options in case your ability to cover payments changes. Credibly offers working capital loan modification5, a proactive option for merchants who may not be able to cover upcoming payments due to slow business. After reviewing recent bank statements, Credibly may temporarily adjust future payments to reflect your current revenue; once sales pick back up, payments return to the original schedule.
Consider a working capital loan if your business:
- Has steady cash flow
- Needs funds for payroll, inventory, rent, marketing, or short-term growth
- Wants a defined repayment timeline
- Can budget for fixed payments
When a merchant cash advance may be the better fit
A small business merchant cash advance may be the better fit if you need fast, flexible capital and have seasonal or fluctuating revenue. Because an MCA is a purchase of future receivables, your business may qualify even if you can’t commit to the remittance schedule of a traditional loan.
For instance, suppose a restaurant near a ski resort gets the chance to buy equipment at a discount during the summer off-season. The owner expects higher sales once the snow falls, but needs capital now to secure the deal. An MCA provides the needed funds within hours, then allows the business to remit a fixed amount based on its revenue.
A key benefit of MCAs for small businesses with seasonal or variable revenue is the ability to reconcile in the event of a slow period. Credibly offers retroactive and proactive options:
- Reconciliation: While remittances are fixed at approval, reconciliation offers a retroactive credit for remittances you’ve already made if your actual revenue comes in lower than expected. If requested, Credibly reviews that month’s bank statements and determines what the remittance should have been. If there’s a difference, Credibly can issue a retroactive credit for that amount. This option is only available with MCAs.
- Modification5: MCA modification is a proactive option that can help if you’re currently in a slow period and don’t think you can cover your next remittance. Upon request, Credibly can review your recent bank statements and temporarily adjust future remittances.
A merchant cash advance may make sense if your business:
- Has seasonal or fluctuating revenue
- Needs capital for a clear revenue opportunity or urgent business need
- Wants flexible use of funds
- Does not want to pledge collateral
How to choose between an MCA and a working capital loan
When considering a merchant cash advance vs. a working capital loan, start with one question: How predictable is your cash flow?
If your business brings in steady revenue and can handle fixed payments, a working capital loan may be the better option for covering short-term, everyday expenses. With a lump sum upfront and a clear timeline for satisfying the loan, you can budget for each repayment from the start.
If your revenue changes from week to week or season to season, you may prefer the flexibility of an MCA. Since a merchant cash advance is a purchase of future receivables, it allows small businesses to cover immediate expenses or pursue growth even if cash flow is limited. Businesses with slow periods can also benefit from an MCA with a reconciliation option, which offers a credit for paid remittances if actual revenue is lower than expected.
The cost of both MCAs and working capital loans is represented as a factor rate instead of traditional interest rates. Learning can help you determine the total cost of funding for either option.
Before choosing a working capital loan or MCA, consider:
- How much capital does your business need
- Whether your revenue is steady or seasonal
- The total cost of financing
- The expected return from using the funds
Credibly offers working capital loans and MCAs2 with factor rates as low as 1.114. Approval is available as fast as 2 hours, with funds deposited as fast as 4 hours1. Use our calculators to find out how much you might qualify for.
FAQs
Want to learn more about the funding options available through Credibly2? Explore our or contact our Customer Success Team today.
What is the main difference between an MCA and a working capital loan?
An MCA is a purchase of future receivables in exchange for automatic daily or weekly remittances, while a working capital loan offers short-term funding with a fixed repayment structure.
Is a merchant cash advance a loan?
No, a merchant cash advance is not a loan. In effect, the business sells a portion of its future receivables in exchange for a lump sum of capital that it then spends as needed. Unlike a loan, remittance isn’t structured around a fixed term; the remittance amount is sized to the business’s actual revenue at approval and withdrawn automatically through daily or weekly ACH transfer.
Is a working capital loan better than an MCA?
It depends on your business’s needs. A working capital loan can benefit businesses with steady revenue that can handle fixed daily or weekly payments. An MCA is more flexible and suited for businesses with fluctuating or seasonal sales.
Can I qualify with less-than-perfect credit?
Credibly requires a minimum credit score of 550 to qualify for MCAs and working capital loans. MCA approval typically places more emphasis on the business’s revenue rather than its credit score.
Do working capital loans and MCAs use factor rates?
Yes, both MCAs and working capital loans use factor rates instead of interest rates. Considerations that affect the factor rate may include a risk assessment, the financing length, and industry trends.
1Financing terms are based on a good-faith estimate and assume consistent monthly revenue. Actual time to satisfy the MCA may vary.
2Credibly merchant cash advances and working capital loans to merchants in California are provided by Retail Capital LLC. All other Credibly products in all other jurisdictions are provided by Credibly or Arizona LLC.
3This Early Remittance Discount Offer is subject to all terms and conditions of your Receivables Purchase Agreement. Discount applies to the factor portion only. Eligibility requires no Events of Default and a timely remittance history. Credibly reserves the right to require a wire transfer for early remittance and to verify the originating account and source of funds used for the Early Remittance Discount.
4Factor rates as low as 1.11.
5Subject to approval.
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