What is a credit card processing loan? (Merchant cash advance guide)

What some people call credit card processing loans are really merchant cash advances (MCAs). 

With a merchant cash advance, you're essentially selling a portion of your future debit and credit card sales in exchange for a lump sum of cash now. The financing company then takes payments out of future card transactions. 

This type of financing is growing rapidly in popularity. It’s often easier to qualify for than traditional bank loans, and funding can be very fast if you qualify (although requirements vary by provider).

But that speed and access comes at a premium. Costs — which are usually called factor rates — can translate to effective annual rates well above what you'd pay for other financing, including credit cards. 

This guide breaks down how credit card processing financing works, what it costs, and whether it makes sense for your situation.

What is a credit card processing loan?

A credit card processing loan — more accurately called a merchant cash advance or business cash advance — looks at past credit and debit card sales, and advances funds based on that sales history.

Your business receives a lump sum, then the MCA provider automatically deducts payments from your daily or weekly card receipts. That happens until the advance, plus the cost of financing, is paid in full.

How it’s different than traditional loans

A number of features set a merchant cash advance apart from traditional loans:

• Payments are often deducted daily or weekly from future card sales.
• Often structured as a percentage of sales, payments usually fluctuate based on sales.
• Cost is usually expressed as a factor rate, not an annual percentage rate (APR).
• There is no discount for paying it  back faster. 
• It is often easier to qualify for MCAs than traditional small business loans. 

How credit card processing loans work

1. Evaluation

The MCA provider evaluates your recent card processing volume for the last 3–6 months, and will offer an advance that typically ranges from 70%–80% of those sales. 

For example: If your business generated an average of $20,000 in monthly sales over the past three months, your advance may be $14,000–$16,000. 

2. Decision made

If you are approved, the provider will deposit these funds directly into your business bank account. Funding can take place in as little as 1–3 business days, depending on the provider and your qualifications. 

3. Repayment begins

Repayment starts immediately — often the next business day. The MCA provider connects directly to your merchant account (the account that processes your card sales) and automatically deducts a percentage before the remainder of the funds hit your bank account. 

Unlike a term loan with fixed monthly payments, your payment will usually vary based on sales. Most providers require daily payments (usually on business days only), though some providers offer weekly repayments.

High sales days mean larger payments while slower sales usually mean smaller ones though it’s not uncommon for MCAs to require some type of minimum payment.

This direct access to your revenue stream is why MCA providers often describe these arrangements as a "purchase of future receivables" rather than loans. 

Understanding factor rates

Merchant cash advances don't usually express costs as annual percentage rates (APRs).  Instead, they use factor rates — and this is where many business owners get confused about the true cost.

A factor rate is a multiplier of the amount of the advance, typically ranging from 1.1 to 1.5. You multiply your advance amount by the factor rate to get your total repayment amount. (There may be other fees in addition to the factor rate, but we’ll keep our example simple here.) 

Unlike APRs, which measure the cost of borrowing over time, factor rates describe the total cost, and they are assessed when you accept the financing. In other words, it doesn’t matter how fast you repay the financing: you’ll still pay the full amount including the factor rate. 

In a moment we’ll illustrate how this translates to APRs. 

What is a holdback?

The holdback is the percentage of your daily credit card sales that is deducted from your merchant processing account to repaying your MCA. 

The holdback is different from the factor rate. The holdback affects your daily cash flow, while the factor rate determines your cost.

Typical holdback percentages range from 10% to 20% of your card receipts. The MCA provider sets this percentage when you're approved, and it remains constant throughout the repayment period.

Here's a simple illustration of how holdbacks can work in practice:

With a 15% holdback:

• Monday: $5,000 in credit card sales → $750 payment (15% of $5,000)
• Tuesday: $2,000 in credit card sales → $300 payment (15% of $2,000)
• Wednesday: $8,000 in credit card sales → $1,200 payment (15% of $8,000)

The holdback percentage determines how quickly you repay your advance. A higher holdback (like 20%) means faster repayment but more pressure on daily cash flow. A lower holdback (like 10%) eases the daily burden but extends your repayment timeline. 

How much do credit card processing loans cost?

The cost of a credit card processing loan, or a merchant cash advance, typically will be much higher than traditional bank small business loans. Factor rates might look reasonable at first glance, but they can translate to effective interest rates of 40% or more. Some even exceed 100%.

MCA costs can also be confusing. As consumers we are used to comparing interest rates on credit cards, car loans, and mortgages using an annual percentage rate (APR). 

But factor rates are not APRs — and that can make it difficult to compare to other financing options. To do that, you need to understand the equivalent APR.

Keep in mind that an annual percentage rate depends on how long it takes to repay the financing. With MCAs, payments typically fluctuate and so does the repayment period. Most merchant cash advances are repaid in 3–12 months, though some may extend to 18 months. 

Here are some illustrations how factor rates may translate to an approximate APR based on how quickly you pay them back:

Here, we’ll use an advance of $10,000 at various factor rates, based on average monthly sales of $20,000: 

These were calculated using Nav’s merchant cash advance calculator (which is used for educational purposes only and is not a loan offer).

Your actual effective rate depends on your exact repayment timeline and terms of your MCA.

It’s also worth pointing out that with these examples, you pay back the same amount at the 10% or 15% holdback; with the higher repayment amount (15% of sales), you pay the balance off faster, and that makes the effective APR higher. 

Additional fees to watch for

Beyond the factor rate, some MCA providers may add other fees:

• Origination fees: One-time charges for processing your application, typically 1%–5% of the advance amount. Not all providers charge these.
• Processing fees: Some companies charge monthly or weekly fees for maintaining the account and processing daily debits.
• Renewal fees: If you refinance or "renew" your MCA before paying it off completely, expect additional fees.

Always ask for and review a complete breakdown of all costs in writing before signing. The total you'll pay should be clear. If it’s not, get clarification before you agree. 

Advantages of a merchant cash advance

Despite the high cost, merchant cash advances offer benefits that make them appealing for certain situations.

Fast approval and funding

Speed is the primary advantage of MCA financing. Some providers make decisions within hours — sometimes the same day you apply. If approved, funds may be deposited in as little as 1–2 business days.

Compare that to traditional bank loans, which can take weeks or more to be approved and funded. If you need capital quickly to restock inventory before a busy season or to cover an unexpected expense, the speed can justify the extra cost.

Easier qualification requirements

Merchant cash advances look primarily at your credit card sales volume, not your credit score. This may make them accessible when traditional financing isn't an option.

Though requirements vary by provider, minimum requirements typically include:

• At least $10,000–$15,000 in monthly credit card sales
• 3–12 months in business
• Personal credit scores as low as 500–550
• An active merchant account processing credit cards
• Not in a high risk or restricted industry 

MCA providers generally care less about your credit history and more about your sales patterns. If you're processing consistent card transactions, you may qualify despite bad credit.

Flexible repayment based on sales

Though the specific repayment structure will vary by provider and your business qualifications, the payment structure often adjusts to your revenue. During slow periods, payments typically decrease. This built-in flexibility can help your business avoid cash flow crunches that might occur with fixed loan payments.

For example, if you run a seasonal business that sees big swings in revenue and your provider offers a 15% holdback based on sales, you may see payments like this:

• Peak season: $10,000/day in sales with 15% holdback = $1,500/day payment
• Off season: $2,000/day in sales with 15% holdback = $300/day payment

Cons of a merchant cash advance

Before you apply for credit card processing financing, understand the significant drawbacks.

Higher cost than traditional loans

The factor rate model means MCAs are often substantially more expensive than most other business financing options. When converted to APR, you might be paying 30%–200% annually — sometimes higher.

Here's a general illustration of how different financing options may compare:

*Rates vary by lender, borrower qualifications, and market conditions.

Daily payment pressure

Business owners don’t always understand how this type of financing affects their future cash flow. Until the financing is paid back, you will be receiving less than the full amount of your sales. This can make it harder to pay other expenses including:

• Payroll
• Rent or lease payments
• Supplier invoices
• Utility bills
• Other loan or credit card payments

Some businesses find themselves short on operating capital because the MCA takes its cut before they can allocate funds to other critical needs.

Potential for debt cycle

The biggest risk with merchant cash advances is the debt cycle they can create. Because repayment happens so quickly and takes such a large chunk of revenue, businesses may find themselves needing another advance before they've finished paying off the first one.

This leads to "stacking", or taking multiple MCAs from different providers. Each one chips away at daily or weekly card receipts until the cumulative holdback percentage becomes unsustainable.

Some businesses end up in a pattern where they're constantly refinancing or renewing MCAs, paying fees each time and never actually reducing their debt burden.

How to qualify for a credit card processing loan

Getting approved for MCA financing is generally straightforward if your business meets the basic criteria.

Minimum qualification requirements

To qualify for most merchant cash advances, you'll need:

• Active merchant account processing debit and credit cards 
• Minimum $10,000–$15,000 monthly credit card volume
• At least 3–6 months in business (some providers require 12+ months)
• Personal credit score of 500–550 or higher
• Active business checking account 
• Valid business license and tax ID
• No active bankruptcies

The exact requirements vary by provider. Some work with newer businesses or accept lower monthly volumes. Others have stricter standards.

Documents you'll need

Prepare these documents for your application:

• Last 3–6 months of bank statements
• Last 3–6 months of merchant account statements 
• Valid government – issued ID
• Business license or incorporation documents
• Tax identification number (EIN or SSN)
• Proof of business address

Most applications are entered and managed online. You'll upload these documents to the provider's portal or send them via email.

Application process step-by-step

Here are the typical application steps along with common time frames. As always, there may be variations depending on the provider and your qualifications. 

1. Submit initial application (can be 5–10 minutes): Provide basic business information and estimated monthly card sales
2. Upload documentation (often 10–15 minutes): Submit bank statements and/or processing statements through secure portal
3. Review and approval (often same day to 48 hours): Provider reviews your sales history and makes a decision
4. Receive offer (immediately after approval): You'll get the advance amount, factor rate, holdback percentage, and total repayment amount
5. Review and sign agreement (can be 15–30 minutes): Read all terms carefully before signing
6. Funding (often 1 – 2 business days): Money deposits directly to your business bank account
7. Repayment begins (often next business day): Automatic deductions start from your merchant account

The entire process from application to funding can take as little as 2–3 business days for approved applicants.

Alternatives to credit card processing financing

Before committing to a merchant cash advance, you may want to look at other options. These may include: 

Business credit cards

Often used for: Smaller purchases, short–term financing, and building business credit.

Business credit cards offer easier approval than traditional loans and provide immediate access to a credit line. Some cards feature 0% introductory APR periods lasting 6–12 months, giving you interest–free financing if you pay the balance in full and on time before the promotional period ends.

After the intro period, rates typically range from 18%–25% APR. That’s still not cheap, but it can be considerably less than most MCAs. Plus, if you get a card that reports to business credit and you pay on time, you may build business credit.

Consider a credit card if you need smaller amounts of funding, have good credit, and can pay back the balance in a relatively short period of time. 

Business lines of credit

Often used for: Ongoing working capital needs and business owners with good credit.

A business line of credit functions like a credit card but typically offers lower rates (10%–25% APR) and higher credit limits ($10,000–$250,000 or more). You draw what you need, pay interest only on what you use, and access it again once it’s been paid back. 

Lines of credit require better credit than MCAs (personal credit scores of at least 650+ are typical). Some may take longer to get approved, though online options are often fast. But once approved, you have ongoing access to capital without reapplying.

Short-term business loans

Often used for: Specific purchases or projects with clear ROI.

Short-term loans from online lenders typically feature repayment terms of 3–18 months with daily or weekly payments. Rates often range from 12%–50% APR depending on your creditworthiness and qualifications.

Short-term loans typically feature fixed payment amounts that don't fluctuate with sales. You'll know exactly what you owe and when you'll be done paying off the loan. 

Online lenders often fund within 1–3 days and some may work with borrowers with lower credit scores than banks require. While not as flexible as an MCA's sales–based repayment schedule, the lower cost and fixed payments may make them worth considering.

Invoice financing

Often used for: B2B businesses with outstanding invoices from creditworthy clients.

If you regularly invoice business customers, invoice financing lets you access that money immediately instead of waiting the 30–90 days some take to pay. You may get 70%–90% of the invoice value upfront, then the rest (minus fees) when your customer pays.

Costs range from 1%–5% of the invoice value, which may be less than MCA rates. And since repayment is tied to specific invoices, it won't affect your daily cash flow the way MCA holdbacks do. The provider will be more concerned with your client’s creditworthiness than yours. 

Consider invoice financing over an MCA if you have substantial accounts receivable and from business customers with good business credit histories.

Traditional bank loans

Often used for: Larger amounts, longer terms, and applicants with strong credit.

Bank loans offer some of the lowest rates (6%–15% APR) and longest terms (1–10 years), but usually require good to excellent personal credit (680+) and/or good business credit, strong financials, and at least 1–2 years in business. The application process may take as long as 2–6 weeks.

If you qualify for a bank loan, it beats every other option on cost. The challenge is qualifying — many businesses that consider MCAs don't meet bank lending standards.

But if your credit is solid and you have time to wait, look at bank loans before considering revenue-based financing.

Popular credit card processing companies

You don’t have to get a merchant cash advance from the same company that handles your credit card processing. Though that can be convenient, some businesses use one provider for processing services and a different provider for financing.

Here are some popular processors, including some that also offer financing solutions: 

Square

Square is popular with small businesses and mobile sellers. It offers both processing and financing. Offers Square Capital. 

Large selection of POS hardware

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Square

Accept payments quickly, easily, and securely. Meet customers where they are with the latest payments services. Square can help you process nearly any kind of payment, any way you want. Millions of brands of all sizes trust Square to accept payments, build customer relationships, and grow their business in-store and online.

Key Features

• POS systems
• Online store
• Inventory management
• Invoicing
• Loyalty program
• Gift cards

Cost/Fees

• Card present: 2.6% + 10 cents
• Card not present: 2.9% + 30 cents
• Keyed in: 3.5% + 15 cents

Types of Businesses Supported

• Food & beverage
• Retail
• Beauty
• Services
• and more

Stripe

Stripe is a developer-friendly payment processing for online businesses. Offers Stripe Capital. 

Simple flat-rate pricing

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Stripe

Simple flat-rate pricing: Stripe offers a clear, straightforward fee per transaction, eliminating the complexity of tiered pricing structures. Wide range of payment options: Supports all major credit and debit cards, mobile wallets, and international payment methods. No setup or monthly fees: Businesses pay only for the transactions they process, with no additional setup or recurring charges.

Key Features

• Simple Flat-Rate Pricing
• Wide Range of Payment Options
• No Setup or Monthly Fees

Cost/Fees

• Standard pricing starts at 2.9% + C$0.30 per successful charge for domestic cards
• Monthly fee $0.00

Types of Businesses Supported

• Retail
• Restaurants
• Professional Services
• E-commerce
• Healthcare
• and more

Shopify

Shopify is popular for online stores and e-commerce, but also processes in-store payments. Offers Shopify Capital. 

Sell online, in-person, and everywhere in between

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Shopify

One platform that lets you sell wherever your customers are — online, in-person, and everywhere in between. It’s never been easier to set up your own online store and bring your brand to life with everything you need to sell online, and get an integrated POS system with everything you need to create seamless shopping experiences between your online and retail storefronts.

Key Features

• Integrated e-commerce & retail
• Creation your online store
• Marketing tools
• Inventory management

Cost/Fees

• Starts at $39/month
• 2.9% + 30¢ USD online
• 2.7% + 0¢ USD in person

Types of Businesses Supported

• E-Commerce
• Retail

Clover

Clover is a full-service point-of-sale systems with integrated payment processing. Offers Clover Capital. 

Other common options include:

• Stax by Fattmerchant: Subscription-based processing with flat monthly fees
• Payment Depot: Membership-based processing with competitive rates
• Helcim: Transparent interchange-plus pricing for businesses of all sizes
• Dharma Merchant Services: Socially responsible processor with nonprofit pricing options
• National Processing: Full-service merchant services with equipment leasing

Shop around for the best credit card processing service based on your business needs first. Then evaluate financing options separately to ensure you're getting the best deal on both services.

When to consider an MCA

A merchant cash advance might work for your business if:

• You need money immediately: If you have a time-sensitive opportunity or emergency that can't wait 2–3 weeks for traditional approval, this may provide a stop-gap solution.
• You have strong credit card sales but weak credit: You process $15,000+ monthly in card sales but your credit score prevents bank loan approval. The MCA uses your sales as qualification.
• The purchase will generate quick returns: You're buying inventory you'll sell within weeks at a high margin, or equipment that will immediately increase revenue. The return on investment may cover the high financing cost.
• Other options aren't available: You've been turned down for traditional loans and lines of credit, and you've exhausted other alternatives. 
• Your business is highly seasonal: You need capital now but will have significantly higher sales in coming months to handle the repayments comfortably.

When to avoid an MCA

You may want to think twice about using a merchant cash advance if:

• You're already struggling with cash flow: The daily deductions will likely make a bad situation worse. If you're behind on bills now, an MCA typically creates more problems than it solves.
• You have time to explore alternatives: If your need isn't urgent, spend a few days or weeks applying for lower-cost options. You may find significantly cheaper options.
• You qualify for better financing: If your personal credit score is 650+, you may be able to get approved for financing with much better terms elsewhere.
• You can't afford the total repayment amount: If the total payback seems too high, it probably is. Don’t just assume that it will all work out. 
• You already have an MCA: Stacking multiple advances creates dangerous debt cycles. Pay off or refinance existing MCAs before considering new ones.
• The purchase won't generate immediate revenue: Using an MCA for long-term investments or expenses that don't quickly generate income makes the high cost even harder to justify.

Frequently asked questions

Before you sign an MCA agreement, get clear answers to these questions:

• What is the factor rate, and what is my total repayment amount?
• How much is the holdback?
• Are there any additional fees beyond the factor rate?
• What happens if I want to pay off the advance early?
• How long does the provider estimate my repayment will take?
• What happens if I have time periods with zero card sales?
• Am I required to maintain my merchant account with a specific processor?
• Are there any renewal or refinancing fees if I need additional capital?
• What are the consequences if I can't make the payments?

Don’t rely just on what a salesperson tells you. Review the terms in writing first.