Working Capital Loan vs. Merchant Cash Advance

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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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 not a loan but an alternative form of a traditional business loan. It gives small business owners access to a lump sum of cash in exchange for credit or debit card sales. With MCAs, you’re essentially selling your future sales.

When determining your eligibility for an MCA, providers will look at your daily credit card receipts and evaluate how much you need and the amount you could pay them back. 

Repayment terms for an MCA vary depending on the lender. Generally, you’ll need to repay the cash advance as a percentage of business sales or fixed withdrawals. 

An MCA can be a great financing option for business owners who accept credit card transactions and require quick access to funds. However, if your business does not process credit card sales, you may want to consider another option. 

What Is a Working Capital Loan?

A working capital loan is short-term financing that small businesses take to finance their day-to-day operations, such as payroll, rent, and debt payments. They are typically used by cyclical companies to fill cash flow gaps during the off-season.

A working capital loan is a flexible loan option for small businesses looking for quick funding to cover immediate expenses. For this reason, this form of financing isn’t used to finance long-term assets or investments but rather short-term operations.

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 a 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 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) 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.

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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.

How Do You Qualify for a Merchant Cash Advance?

Qualifying for an MCA is often fast and easy due to the nature and terms of the funding. Generally, most MCA lenders require borrowers to accept credit card payments because these transactions are used to repay the loan. 

You need credit card sales and need to show that you have enough to pay back the amount borrowed without falling behind payments. 

Depending on the MCA lender, you may need to provide the following information:

  • Social Security number
  • Business tax ID
  • A few months’ worth of credit card transactions

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 monthly 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, making it a good option for jumping into a growth opportunity.

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. For this reason, it may not be a better option to meet long-term business goals.

How to Apply for a Working Capital Loan

Are you ready to apply for a working capital loan? You can get the business funding you need through Mulligan Funding. This online lending partner offers competitive rates with fast approvals and terms customized to your current business situation. (*) (1)

Request a free quote from Mulligan Funding for your business financing needs.

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