What Is Revenue-Based Funding (a Merchant Cash Advance) and How Does It Work?
Revenue-based funding, often called a merchant cash advance, gives a business a lump sum now in exchange for a share of its future sales. It is one of the fastest kinds of business funding to arrange, and usually one of the more expensive, so it is worth understanding exactly how it works before you sign.
The short answer
A funder buys a fixed amount of your future revenue at a discount. You receive the purchase price up front, and the funder collects the larger amount over time, either as a percentage of your daily deposits or as a fixed daily or weekly debit from your business bank account. Approval leans mostly on your recent revenue, not just your credit, which is why it can move quickly.
How the cost is quoted: the factor rate
Instead of an interest rate, the cost is usually shown as a factor rate, a multiplier applied to the amount you receive. The total you pay back is the advance times the factor rate, and it does not change if you take longer or shorter to repay.
Worked example
A business receives a $50,000 advance at a factor rate of 1.35. The total payback is $50,000 x 1.35 = $67,500, so the cost of the funding is $17,500.
If that is collected over about six months of business days (roughly 126 debits), each daily payment is about $535.
Figures are illustrative only. Actual amounts, factor rates and terms depend on the business and the funder.
Because the cost is fixed rather than accruing over time, a short repayment period can make the effective annual cost much higher than the factor rate suggests. Comparing the total payback and the payment size across offers is the clearest way to see what you are really paying.
How payments work
- Fixed debits. The most common setup today: the same amount is debited every business day or every week until the total is collected.
- A percentage of deposits. Some agreements collect a set share of your card sales or deposits, so you pay more in a strong week and less in a slow one.
- Reconciliation. Many agreements let you ask for payments to be adjusted if your revenue drops. Ask how that works before you sign.
Is a merchant cash advance a loan?
It is usually structured as a purchase of future receivables, not a loan, which is why it is quoted with a factor rate rather than interest and why lending rules may not apply in the same way. Courts and regulators look at the substance of each agreement, though, and some states now require cost disclosures for this kind of financing. Read the agreement itself to see what you are signing.
When it makes sense, and when it does not
It tends to fit a short, specific need where speed matters and the money pays for itself: covering payroll while a large receivable comes in, stocking up ahead of a busy season, or a repair that keeps the business running. It is a poor fit for long-term needs, or for paying off another advance unless the new payment is clearly lower and the math works.
Revenue-based funding compared with other options
- Line of credit: usually cheaper and you pay only on what you draw, but it needs stronger credit and history and takes longer to set up.
- Term loan: fixed payments over a longer period and generally lower cost, with more paperwork.
- Equipment financing: the better choice when the money is buying a specific asset.
Questions to ask before you sign
- What is the total payback, and what is each payment, daily or weekly?
- Are there fees deducted from the amount I receive?
- Is there a discount if I pay early?
- Can payments be adjusted if my revenue drops, and how do I ask?
- Does the agreement allow other financing while it is open?
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