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Working Capital Loan vs. Merchant Cash Advance

Written by Allison Martin

Allison Martin is a personal finance enthusiast and a passionate entrepreneur. With over a decade of experience, Allison has made a name for herself as a syndicated financial writer. Her articles are published in leading publications, like, Bankrate, The Wall Street Journal, MSN Money, and Investopedia. When she’s not busy creating content, Allison travels nationwide, sharing her knowledge and expertise in financial literacy and entrepreneurship through interactive workshops and programs. She also works as a Certified Financial Education Instructor (CFEI) dedicated to helping people from all walks of life achieve financial freedom and success.

Updated November 6, 2023​

7 min. read​

No matter how much money small businesses save, they’ll always need quick access to cash at some point in their operations. Working capital loans and merchant cash advances are two financing options that most small businesses can take out to cover emergency expenses.

If you’re looking for quick access to funds to finance your business needs, you might be wondering whether to go for a working capital loan or a merchant cash advance. While both loan options offer fast access to funds, each works uniquely.

Find out which of the two options is right for your business.

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What Is a Merchant Cash Advance?

A merchant cash advance (MCA) is a unique financial product that offers small business owners the opportunity to access a lump sum of cash in exchange for a percentage of their future credit or debit card sales. Unlike traditional loans, an MCA is not a loan but rather a cash advance that is repaid through a percentage of future sales.

To determine your eligibility and the amount you can borrow, lenders will typically evaluate your daily credit card receipts. The amount you’re approved for will depend on the lender, your company’s creditworthiness, and its sales history. Repayment terms for an MCA can vary depending on the lender, but generally, you will need to repay the cash advance as a percentage of your business’s sales or through fixed withdrawals.

For small business owners who require quick access to funds and accept credit card transactions, an MCA can be a useful financing option. However, it’s important to note that MCAs can come with higher interest rates and fees than traditional loans, making them a more expensive option for financing. Additionally, if your business does not process credit card sales, an MCA may not be the best option for you.

Before deciding whether an MCA is the right financing option for your business, it’s important to carefully consider the costs and benefits. While an MCA can provide quick access to funds, it’s important to ensure that you can afford the repayment terms and that the costs associated with the advance do not outweigh the benefits. As with any financial product, it’s important to compare lenders and shop around to find the best terms and rates for your business’s needs.

What Is a Working Capital Loan?

A working capital loan is a unique type of loan that helps small businesses meet their short-term financial needs. It provides businesses with the necessary funds to cover their day-to-day expenses, such as payroll, rent, and debt payments. Businesses that experience seasonal fluctuations in revenue or need to cover unexpected expenses often use working capital loans.

Small businesses can benefit from working capital loans as they help manage their cash flow. These loans can bridge the gap between slow periods and busy periods, allowing businesses to operate smoothly even when revenue is low. Furthermore, working capital loans can provide businesses with the necessary funds to take advantage of new opportunities, such as purchasing inventory at a discounted price.

Working capital loans are flexible, unlike traditional loans that have strict repayment terms and require collateral. They are typically unsecured and have shorter repayment periods, making them an ideal option for small businesses that need quick access to funds.

Companies can also use working capital loans to manage their inventory and accounts receivable. For instance, a business that needs to purchase inventory for an upcoming busy season may use a working capital loan to finance the purchase. Similarly, a business waiting for payment from a customer may use a working capital loan to cover its expenses until the payment is received.

Ultimately, working capital loans are a flexible loan option for small businesses looking for quick funding to cover immediate expenses. They are not used to finance long-term assets or investments but rather short-term operations.

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Merchant Cash Advance vs. Working Capital Loan

Choosing between an MCA and a working capital loan can seem challenging for some businesses. Understanding the differences can help you make an informed decision.

Loan Vs. Non-loans

A merchant cash advance isn’t a loan. Instead, it’s a cash advance based on business credit card sales. When you take out an MCA, your lender will give you a lump sum amount, which is repaid by taking a percentage of your daily or weekly credit card sales and sometimes monthly credit card sales.

On the other hand, working capital loans are short-term loans that businesses take to finance everyday operations. With this type of loan, you also get a lump sum of money but repayable in monthly installments.


Merchant cash advances typically have higher annual percentage rates (APR), expressed as a factor rate, than most small business loans. With working capital loans, however, you can get lower APRs.


MCAs are typically riskier than working capital loans because you’re using future credit sales to repay the amount borrowed. Keep in mind that you’re not sure if your business will bring in enough credit card transactions to pay back the debt.


Unlike other business financing options, a merchant cash advance doesn’t have a rigorous approval process. It’s easy to obtain an MCA as it doesn’t require several qualifications like good credit.

While working capital loans don’t require good credit either, your business must have been in operation for a certain period, and lenders may be hesitant to work with you if you have poor credit.

Use Allowances

Although both loan options don’t limit how you should use the funds borrowed, there are exceptions. For example, an equipment loan, a type of working capital loan, can only be used to purchase business equipment. However, with MCAs, there are no such restrictions.

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How Do You Qualify for a Merchant Cash Advance?

Merchant cash advances (MCAs) are a popular alternative to traditional bank loans for small business owners who need quick access to funding. Unlike traditional loans, MCAs are based on a percentage of your credit card sales, making them an attractive option for businesses that may not have a strong credit history or collateral to secure a loan. It’s relatively simple to qualify for an MCA in many instances due to the flexible nature of this financing option.

Most lenders require that you accept credit card payments. This is because the loan is repaid through a percentage of your daily or weekly credit card sales. The lender will take a percentage of your sales until the loan is paid off. This means that the lender is taking on some of the risk associated with your business, as they are only paid back when you make sales.

In addition to accepting credit card payments, you will need to show that you have a steady flow of credit card sales. The lender will want reassurance that you have enough sales to pay back the amount borrowed without falling behind on payments. Most lenders will require you to provide a few months’ worth of credit card transactions to prove that you meet this requirement.

Some MCA lenders also require you to provide other information to qualify for a loan. This may include your Social Security number and business tax ID. This information is used to verify your identity and ensure that you are a legitimate business owner. The lender may also want to see your business bank statements to confirm that you have a steady flow of income.

It’s important to note that each MCA lender may have different requirements, so do your research and find a lender that is a good fit for your business. Some lenders may require a minimum credit score or a certain amount of time in business. Others may require collateral or a personal guarantee. Be sure to read the lender’s terms and conditions carefully before agreeing to the loan.

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Advantages and Disadvantages of a Merchant Cash Advance vs. Working Capital Loan

As with any other financial product, MCAs and working capital loans have upsides and downsides. Weighing the pros and cons of each will help you choose the right financing option for your business.

Advantages of a Merchant Cash Advance

  • Fast Funding: You need less paperwork to apply for an MCA, and you can typically get funding in less than 24 hours or a couple of days, depending on the merchant cash advance provider.
  • Lenient Eligibility Requirements: Unlike other business financing options, MCA providers are less concerned with your credit score than with your credit card processing statements.
  • Flexible Payment Terms: MCAs have a flexible repayment schedule compared to short-term loans. During a slow sales period, you can adjust your holdback rates, the percentage of your daily or weekly credit sales that your MCA provider will take until you return the borrowed amount in full.

Disadvantages of a Merchant Cash Advance

  • MCAs Aren’t Legally Considered Business Loans: Since MCAs aren’t loans, they are not subject to the same laws that protect traditional loans. Taking this type of business funding could put you at risk for predatory lending practices.
  • Your Approved Amount Could be Limited: The amount of MCAs is determined using debit and credit card transactions. Even if your business generates a huge revenue, your cash advance amount will be limited to your sales.
  • Payment Terms Are Difficult to Predict: While MCAs have flexible payment terms, it’s difficult to predict when you’ll repay your loan in full because sales fluctuate.

Advantages of a Working Capital Loan

  • Payment Terms Are Convenient: Working capital loans have a consistent payment schedule, making it easy to predict when you can settle your loan and plan for future financial contingencies.
  • Your Loan Isn’t Tied to Card Transactions: Unlike MCAs associated with credit card transactions, working capital is a flexible financing option ideal for various types of businesses.
  • Funds Can Be Used for Any Business Purpose: You can use a working capital loan to finance any business operations. This makes it a good option for jumping into a growth opportunity.
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Disadvantages of a Working Capital Loan

  • It May Impact Your Credit: If you miss payments or default on your loan, your credit score can suffer.
  • You May Have to Repay Quickly: A working capital loan is a short-term business loan that needs to be repaid within a short period of time. For this reason, it may not be a better option to meet long-term business goals.

Working Capital Loan vs. Merchant Cash Advance: Which Is Best:

When deciding between a working capital loan and a merchant cash advance, it’s vital to consider the unique needs of your business. If you require quick access to funds to cover short-term expenses, a working capital loan may be the ideal option for you. However, if you need a more significant amount of funds and can afford the higher costs associated with an MCA, it could be the better choice.

It’s also essential to consider the repayment terms and associated costs for both forms of financing. Working capital loans typically have fixed interest rates and repayment terms, while MCAs are repaid through a percentage of future credit card sales. This means that the cost of an MCA can vary depending on your company’s sales volume, making it crucial to carefully evaluate the repayment terms before deciding on this option.

Ultimately, both working capital loans and merchant cash advances can be useful financing options for small businesses. When choosing between the two, it’s vital to consider the specific needs of your business and to thoroughly assess the costs and benefits of each option to make an informed decision.

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