MCA vs. Line of Credit: Which Is Right for Your Business?

Two Approaches to Working Capital

When your business needs flexible funding, merchant cash advances (MCAs) and business lines of credit are two of the most common options. Both provide working capital, but they work very differently—and choosing the wrong one can cost your business thousands of dollars.

Understanding the fundamental differences between these products helps you match the right financing tool to your specific situation.

How MCAs Work

A merchant cash advance provides a lump sum of capital in exchange for a percentage of your future sales. Technically, you're selling future receivables, not borrowing money.

Repayment happens automatically—typically a fixed percentage of daily credit card sales or a fixed daily/weekly ACH withdrawal from your bank account. When sales are high, you pay more; when sales are slow, you pay less (with the percentage-of-sales model).

How Lines of Credit Work

A business line of credit provides access to a pool of funds you can draw from as needed. You only pay interest on the amount you've borrowed, and as you repay, that credit becomes available again.

Lines of credit function like a business credit card but typically with lower interest rates and higher limits. You can draw funds, repay, and redraw repeatedly throughout the draw period.

Key Differences at a Glance

Here is how MCAs and lines of credit compare on key features:

Cost Comparison

This is where the products differ most dramatically. MCAs use factor rates that can translate to very high APRs, while lines of credit use traditional interest rates.

When an MCA Makes Sense

Despite higher costs, MCAs serve legitimate purposes:

• Urgent need — When you need funds in 24-48 hours
• Credit challenges — When credit score or history disqualifies you from other options
• Short-term opportunity — A clear opportunity to generate ROI exceeding the cost
• Seasonal surge — Inventory for a known busy season with predictable returns
• No other options — When traditional lenders have declined you

When a Line of Credit Makes Sense

Lines of credit work best for ongoing or uncertain capital needs:

• Ongoing working capital — Managing cash flow gaps regularly
• Unknown amounts — When you are not sure exactly how much you will need
• Recurring needs — Inventory purchases, payroll gaps, seasonal fluctuations
• Cost sensitivity — When minimizing financing costs matters
• Flexibility preference — Want to borrow only what you need, when you need it

Qualification Requirements

MCAs have more lenient requirements, which is why many businesses turn to them despite higher costs.

Impact on Cash Flow

MCA repayments happen daily, which can significantly impact your operating cash. A business paying $500/day toward an MCA advance has $10,000-11,000 less available each month for other expenses.

Lines of credit typically have monthly payments, and you control when you draw funds—giving you more flexibility to manage cash flow.

The Stacking Problem

Some businesses fall into a dangerous pattern: taking an MCA, then needing another MCA to manage cash flow, then another. This "stacking" of multiple advances can quickly become unsustainable.

With a line of credit, the revolving nature means you don't need new financing each time—you simply draw from your existing credit.

Building Toward Better Options

If an MCA is your only current option, use it strategically to build toward better financing:

• Use MCA funds to grow revenue and build business credit
• Make all payments on time to demonstrate reliability
• Apply for a small line of credit to establish traditional credit history
• Work on improving personal credit score
• Build bank account history with consistent deposits

Questions to Ask Before Choosing

Consider these questions when deciding between an MCA and a line of credit:

• How urgently do I need the funds?
• Can I qualify for a line of credit based on credit and time in business?
• Do I know exactly how much I need, or is the amount uncertain?
• Is this a one-time need or ongoing?
• What is my plan to repay — can I handle daily withdrawals?
• What is the true total cost of each option?

Making Your Decision

If you qualify for both options, a line of credit almost always costs less and provides more flexibility. The higher cost of MCAs is justified only when other options aren't available or when timing is critical.

Be honest about your situation: if you're considering an MCA because it's easier, take the extra time to apply for a line of credit. The cost savings over time are substantial.