Key points
- A loan is a debt with a fixed schedule; a true MCA is a sale of future receipts collected as sales come in.
- A factor rate of 1.30 is not 30%: on $40,000 over 6 months the MCA costs $12,000 against $3,571.99 of interest on a 30% APR loan.
- Loans lean on credit, time in business and financial statements; MCAs lean on bank deposits and fund faster.
- Usury caps apply to loans, not true sales, and courts look at reconciliation, term and recourse to decide which you have.
- Choose the loan when you qualify and can wait; use an MCA only for short, urgent needs that clearly pay back.
The core difference in one sentence
A term loan has a principal balance, an interest rate, a payment schedule and a maturity date. You owe every payment whether sales rise or fall. A merchant cash advance has a purchase price, a purchased amount, a factor rate and a specified percentage of sales. In a true MCA, collections are tied to sales and can be reconciled when sales drop.
Almost every other difference, from how the price is quoted to what happens in court, flows from that one. It is also why the paperwork, the speed and the people who qualify are so different.
How each one quotes its price
A loan's interest is charged on the balance you still owe, so it falls as you repay and stops when you pay off. An MCA's cost is set on day 1 as the advance times the factor rate, minus the advance, and does not fall as you pay unless the contract offers an early payoff discount.
Worked example: the same $40,000, priced 2 ways.
- MCA at a factor rate of 1.30 over 6 months of daily debits: payback $52,000, cost $12,000, $412.70 per business day, estimated APR about 109%.
- Term loan at a 30% APR over 12 months of monthly payments: $3,899.49 a month, total interest $6,793.82.
- The same loan over 6 months: $7,262.00 a month, total interest $3,571.99.
The 30 in a factor rate of 1.30 and the 30 in a 30% APR have nothing to do with each other. Over the same 6 months, the MCA costs more than 3 times the interest on the loan. The only honest way to line them up is to convert the MCA to an estimated APR and compare dollars for the same period.
Collateral, guarantees and liens
Bank and SBA loans can require a lien on business assets and personal guarantees from the owners. SBA rules, for example, say holders of at least 20% ownership generally must guarantee a 7(a) loan. Equipment loans are secured by the equipment itself.
An MCA funder may file a UCC-1 on your receivables and ask the owner to guarantee performance of the contract: that you will not divert deposits, switch accounts or hide sales. Some published offers skip hard collateral altogether. South End Capital, for example, advertises term loans with no hard collateral required but asks for a 660 credit score and 2+ years in business. Read what any guarantee actually covers before you sign it.
Speed and paperwork
With Openbook Capital, the application takes about 3 minutes and needs no SSN and no bank login. A funding specialist then asks for the last 4 months of business bank statements. Offers often come back within 1 to 2 business days of complete documents, and funding typically lands 1 to 2 business days after signing, depending on the funder and the bank.
Bank and SBA lenders ask for more, often including tax returns, a profit and loss statement, a balance sheet and a debt schedule. For SBA loans, the SBA's own review of a standard 7(a) loan takes 5 to 10 business days, and that clock starts only after the lender has finished its underwriting. Our guide to SBA loans covers the full process.
Credit and eligibility
Published loan criteria show the gap. South End Capital's term loans ask for a 660 credit score, 2+ years in business and $20,000 in monthly revenue, with fixed rates from 8.77%. BHG Financial publishes business loan APRs from 8.77% to 41.26% with terms of 1 to 12 years.
MCA funders focus on deposits, daily balances, returned payments and existing advances. Openbook can usually help businesses with 6+ months in business, $10,000+ in average monthly deposits and a U.S. business checking account. Every credit profile is reviewed, and most funders look for a personal credit score of 500+.
The legal differences
Usury. Interest caps apply to loans. In New York, charging more than 25% a year on a loan without authorization is criminal usury under Penal Law § 190.40. A true MCA is not a loan, so the cap does not apply, but courts look past the label. In LG Funding v United Senior Properties of Olathe (2020), a New York appellate court weighed whether the contract had a reconciliation provision, whether it had a finite term and whether the funder had recourse if the merchant went bankrupt.
If the business fails. With a loan, you still owe the balance if the business closes. With a true MCA, a drop in sales, or even a closure without any breach of the contract, is the funder's risk; that is what the bankruptcy-recourse factor tests. A contract that makes the full balance due whenever sales stop behaves more like a loan than a purchase.
Enforcement. When an advance works like a loan, regulators act. In January 2025 the New York Attorney General announced a settlement with Yellowstone Capital that included a $1.065 billion judgment, alleging fixed daily collections and effective annual rates of up to 820%.
Collection tools. Some MCA contracts include a confession of judgment. New York's CPLR 3218 now allows these to be filed only in the county where the defendant resided. Disclosure laws cover both products: New York's law, for example, applies to sales-based financing and to closed-end loans. See our New York law page.
MCA and term loan side by side
| Feature | Merchant cash advance | Business term loan |
|---|---|---|
| What it is | Purchase of future receivables | Debt repaid with interest |
| Price quoted as | Factor rate, fixed dollar cost | Interest rate or APR |
| Payments | Share of sales, or fixed daily or weekly debit with reconciliation | Fixed weekly or monthly |
| If sales drop | Payments should drop with reconciliation | Payments stay the same |
| Paying off early | Saves money only with a written discount | Stops future interest unless there is a prepayment penalty |
| Main approval factor | Bank deposits | Credit, time in business, profit |
| Typical paperwork | Recent bank statements | Tax returns, financial statements |
| Usury caps | Do not apply to a true sale | Apply, subject to state law |
Which one fits your situation
- Take the loan if you qualify, can wait for approval and the money funds something that pays back over a year or more, such as a renovation or a second location.
- Consider the MCA if the need is urgent and short, such as a walk-in cooler that failed before a holiday weekend, and the cash it protects clearly exceeds its dollar cost.
- Be careful with either if the payment would take more of your deposits than your margin can carry.
- Think twice about an MCA if you plan to apply for an SBA 7(a) loan soon, because SBA rules in effect since June 1, 2025, generally bar using 7(a) proceeds to refinance an MCA.
Before you decide, run the loan option through our loan calculator and compare its total interest with the MCA's dollar cost over the same months.
Questions
Is an MCA easier to get than a business loan?
Usually it is faster and leans less on credit, because funders underwrite mainly from bank deposits. The trade-off is price: in our worked examples, MCAs carry far higher estimated APRs than bank or SBA loans.
Which is cheaper, an MCA or a loan?
Compare the dollar cost over the same period and the estimated APR. In our worked example, $40,000 cost $12,000 as an MCA over 6 months and $3,571.99 in interest as a 30% APR loan over the same 6 months.
Can a court treat an MCA as a loan?
Yes. Courts look at how the contract works, including whether it has a real reconciliation provision, a finite term and recourse if the business goes bankrupt. If a court finds the deal is a loan, state usury limits can apply.
Can I use a business loan to pay off an MCA?
It can be, through a consolidation or refinance loan from a lender that allows it. SBA 7(a) loans are the exception: under SBA rules in effect since June 1, 2025, their proceeds generally cannot refinance a merchant cash advance.
Have an offer on the table?
Decode it before you sign, or let us bring back offers from funders that fit, each with its full cost.
Sources
- LG Funding, LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664 (2d Dept 2020) — New York State Law Reporting Bureau (checked 2026-09-30)
- N.Y. Penal Law § 190.40, criminal usury in the second degree — New York State Senate (checked 2026-09-30)
- N.Y. CPLR § 3218, judgment by confession — New York State Senate (checked 2026-09-30)
- N.Y. Financial Services Law § 801, definitions — New York State Senate (checked 2026-09-30)
- Attorney General James announces $1 billion settlement with predatory lender Yellowstone Capital — New York State Attorney General (checked 2026-09-30)
- 13 CFR § 120.160, loan conditions (personal guarantees) — Legal Information Institute, Cornell Law School (checked 2026-09-30)
- 7(a) loan program: terms, conditions and eligibility — U.S. Small Business Administration (checked 2026-09-30)
- Programs — South End Capital (checked 2026-09-30)
- Small business loans — BHG Financial (checked 2026-09-30)
- Key updates in the SBA's revised standard operating procedures — Byline Bank (checked 2026-09-30)
This guide is general information, not legal, tax or financial advice. Figures are examples worked with the method in our disclosures.