Before You Take a Merchant Cash Advance, Consider These 7 Alternatives

The appeal of merchant cash advances is understandable: fast funding, minimal paperwork, and approval even with imperfect credit. But with effective APRs that can exceed 100%, MCAs should be a last resort, not a first choice.

Before signing an MCA agreement, consider these alternatives. Some require more effort to obtain, but the savings can be substantial — often tens of thousands of dollars for the same amount of financing.

1. SBA Microloans: Government-Backed Affordable Financing

The SBA Microloan program offers loans up to $50,000 through nonprofit community lenders. These loans are specifically designed for small businesses and startups that can't access traditional bank financing.

SBA microloans also often come with technical assistance and business counseling. The main trade-off is timing — if you need money tomorrow, this isn't the answer. But if you can plan a few weeks ahead, the cost savings are significant.

2. Online Term Loans: Faster Than Banks, Cheaper Than MCAs

Online lenders have transformed small business lending. They use technology to underwrite loans quickly while offering rates between traditional banks and MCAs.

While online term loan rates are higher than banks, they're structured as actual loans with APR disclosure and clear terms. Compare the APR to an MCA's effective rate to see the difference.

3. Business Line of Credit: Pay Only for What You Use

A business line of credit works like a credit card — you have access to funds up to a limit and only pay interest on what you draw. This makes it ideal for managing cash flow fluctuations or unexpected expenses.

The best time to get a line of credit is before you need it. If you apply while your business is doing well, you'll get better terms and have the safety net ready when cash flow tightens.

• Interest on balance only: Unlike MCAs where you pay the full factor rate regardless of how long you hold the money, you only pay interest on outstanding balances.
• Builds credit: Responsible use of a business line of credit can improve your business credit profile.
• Available for future needs: Once established, you can draw funds as needed without reapplying.

4. Invoice Factoring: Turn Unpaid Invoices Into Cash

If your business has outstanding invoices from creditworthy customers, invoice factoring can convert those receivables into immediate cash. Unlike MCAs, factoring is based on your customers' creditworthiness, not yours.

Invoice factoring has some similarities to MCAs — you're selling a future payment at a discount. But the costs are typically much lower, and some factoring companies take on collection responsibility.

5. Equipment Financing: Use the Asset as Collateral

If you need to purchase equipment, using equipment financing instead of an MCA can be significantly cheaper. The equipment itself serves as collateral, making lenders more willing to offer favorable terms.

Equipment financing is available even for businesses with imperfect credit because the lender can repossess the equipment if you default. This collateral-backed approach means lower rates than unsecured financing.

• Tax advantages: Equipment purchases may qualify for Section 179 deductions. Consult a tax professional for details.
• Preserves cash: Finance the full purchase rather than depleting reserves.
• Builds equity: At the end of the term, you own the equipment outright.

6. Business Credit Cards: Flexibility With Familiar Terms

Business credit cards are often overlooked for larger expenses, but they can be a viable alternative to MCAs for amounts up to $50,000 or more. Many cards offer 0% introductory APR periods.

The key to using business credit cards effectively is taking advantage of 0% APR promotional periods. If you can pay off the balance within the intro period, your financing cost is zero.

7. Nonprofit and CDFI Lenders: Mission-Driven Financing

Community Development Financial Institutions (CDFIs) and nonprofit lenders are specifically designed to serve businesses that traditional banks overlook. They often accept lower credit scores and offer business support services.

CDFIs include organizations like Accion, Grameen America, Kiva, and local community lenders. Many focus on underserved communities, minority-owned businesses, or specific industries.

• Lower rates: As nonprofits, CDFIs aim for sustainability, not maximum profit.
• Technical assistance: Many offer business coaching, financial education, and networking.
• Credit building: Successful repayment is typically reported to credit bureaus.
• Second chances: CDFIs often work with businesses that have had past credit problems.

Comparing All Options at a Glance

Here's how these alternatives generally compare to a typical merchant cash advance:

*Invoice factoring costs vary based on how long invoices are outstanding.

Note: Rates and terms vary significantly by lender, credit profile, and market conditions. Always get quotes and compare actual offers.

The Bottom Line: Explore Alternatives First

The extra effort required to pursue these alternatives typically pays off. Even if an online term loan takes two extra days compared to an MCA, the difference in financing cost can be substantial.

Before accepting an MCA, ask yourself: Have I truly explored every option? Have I contacted local CDFIs? Have I checked my eligibility for SBA programs? Have I looked at invoice factoring or equipment financing if applicable?

MCAs have their place as an absolute last resort. But in our experience, most businesses that take MCAs haven't fully explored the alternatives.