What is my merchant cash advance really costing me?
A merchant cash advance usually costs far more than it looks, because the price is quoted as a factor rate on a short term instead of an annual rate. A $150K advance at a 1.40 factor rate means you repay $210K. If that’s collected through daily debits over about eight months, the $60K cost on a balance that shrinks every day works out to an effective annual cost commonly well above 100%.
Stacking makes it worse. Owners take a second advance to cover the cash hole from the first, then a third. Each new funder knows about the others and prices for the risk. By the time most owners look for a way out, daily debits are eating 15% to 30% of deposits and the business is running to stand still. Put your own contracts into the MCA vs. factoring calculator to see the number in plain terms.
| Three stacked MCAs | Factoring facility | |
|---|---|---|
| Amount received | $90K + $70K + $50K = $210K | $255K first advance (85% of $300K eligible AR) |
| Repayment | $294K total payback at 1.35–1.45 factor rates | Customers pay the invoices; you get the 15% reserve back minus fees |
| Payment schedule | About $3,600 every business day, roughly $78K a month | No fixed daily debit |
| Typical cost | Effective annual cost often well above 100% | Roughly 2%–4% of each invoice on 30–60 day payers |
| Lien position | Each MCA usually files a UCC on receivables | Factor holds first position on receivables after payoffs |
How does a factoring refinance pay off MCAs?
A factoring refinance pays each MCA its payoff amount out of the first funding, so the daily debits stop at closing. The funder buys your eligible open invoices, advances a percentage of their value, and wires the MCA funders directly against their payoff letters. Going forward, you’re paid when you invoice, and the cost is tied to how long your customers take to pay.
The deciding number is coverage. Add up every MCA payoff. Then take your eligible receivables (generally invoices under 90 days to creditworthy commercial or government customers, without disputes) and multiply by the advance rate. If the advance covers the payoffs with something left for operations, the refinance usually works. If it doesn’t, you may need to keep one smaller MCA running, add cash, or wait until receivables grow.
A quick test: total MCA payoffs divided by eligible AR. Under about 60% usually leaves room for operating cash after the refinance. Over 85% is hard to make work without another source.
Why doesn’t every MCA borrower qualify for a factoring refinance?
Factoring only refinances what invoices can carry. Many MCA borrowers are restaurants, retailers or service businesses paid by card or cash, with no B2B invoices to sell. They need a different solution. Even among invoicing businesses, some files don’t work.
- No commercial receivables. Card sales and consumer billing can’t be factored.
- Payoffs exceed coverage. If MCA balances are larger than what your eligible AR supports, the math fails.
- Invoices aren’t clean. Progress billing without sign-offs, heavy disputes, or customers who won’t verify invoices.
- Active defaults and judgments. If an MCA has already sued, frozen accounts or filed a judgment, it must be resolved or settled first.
- Unpaid payroll taxes. A federal tax lien can take priority over a factor’s interest in receivables, so funders require a plan before closing.
- Diverted payments. If customer payments were ever redirected around an existing lienholder, funders treat it as a serious red flag.
How do MCA payoff letters work?
An MCA payoff letter is the funder’s written statement of the exact amount needed to satisfy the contract by a specific date, and its promise to release its UCC lien and stop debits once paid. The new funder won’t wire without one from every MCA being retired. Ask for them the same day you accept a term sheet.
Read them closely. Some MCA contracts offer an early payoff discount; many require the full remaining purchased amount regardless of timing. Check that the letter states the balance net of any debits that will clear before closing, includes wiring instructions you confirm by phone, and commits to file a UCC-3 termination and to send no further ACH debits. Get the debit-stop language in writing, because a stray debit after closing can bounce payroll.
What is a reconciliation clause and should I use it?
A reconciliation clause lets you ask the MCA funder to adjust your payments to match the agreed percentage of your actual receipts. Most MCAs are written as purchases of a share of future receivables, not loans, and that structure often requires a way to adjust the fixed daily amount if your revenue falls. Many owners don’t know they have the right.
It can be a useful bridge while a refinance closes: lower daily debits for a few weeks can keep payroll intact. Request reconciliation in writing, exactly as the contract requires, with the bank statements it asks for. Don’t simply stop the debits or change bank accounts. Unilaterally blocking ACH payments is often a breach that can trigger collection, lawsuits and account freezes, and it will spook any funder looking at your file.
Be careful with debt settlement companies that tell you to stop paying MCAs while they negotiate. That approach can lead to defaults, lawsuits and frozen accounts, and it usually makes a factoring refinance harder, not easier.
Can I combine factoring with an SBA loan to get out of MCAs?
Yes, and for some companies the best exit uses both. SBA 7(a) loans can in some cases be used to refinance existing business debt, subject to SBA rules and the lender’s judgment, but SBA lenders are cautious about businesses with heavy MCA debt and stressed cash flow. A common sequence is to factor first to stop the daily debits, run 6 to 12 months of clean statements, then pursue an SBA loan to term out remaining debt or fund growth.
If you already have an SBA loan, the SBA lender almost always holds a blanket lien. A factor can still work alongside it if the SBA lender subordinates its interest in receivables or signs an intercreditor agreement. It’s routine for experienced funders, but it adds a week or two. Factoring with an SBA loan explains how that’s structured.
What happens to my cash flow after the refinance?
The biggest change is that the fixed daily drain stops. Instead of $3,000 to $5,000 leaving every business day regardless of sales, your cost now tracks the invoices you fund and how fast your customers pay. In a slow month you fund less and pay less.
Plan for the first 60 days honestly. The factor holds back a reserve, commonly 5% to 30% of each invoice, which it releases minus fees when your customer pays. Your first few weeks may feel tight while the old MCA debits clear and the reserves build. After that, most owners find they can pay vendors on time again. Read factoring vs. a merchant cash advance for the long-term differences.
Step by step
- List every MCA and its balanceFor each advance, note the funder, remaining purchased amount, daily or weekly debit, and whether it filed a UCC lien.
- Pull your AR agingIdentify eligible invoices: under 90 days, to creditworthy business or government customers, not disputed.
- Run the coverage testMultiply eligible AR by about 80%–90% and compare it to total MCA payoffs. Use the MCA vs. factoring tool to model cost.
- Get a term sheetSend your aging, customer list, MCA contracts and bank statements to a funder who handles MCA consolidations.
- Request payoff letters from every MCAAsk for exact payoff amounts, wiring instructions, debit-stop language and UCC-3 termination commitments.
- Close and confirm debits stoppedThe funder wires each payoff. Watch your bank account for any further debits and confirm each UCC-3 is filed.
Illustrative scenario
Security guard company buried under three stacked advances
A licensed security company billing about $420K a month to property managers and a regional hospital system took three MCAs over nine months to fund payroll on new posts. Combined daily debits reached roughly $3,900, about $85K a month, and remaining payoffs totaled $236K. The company had $510K in receivables, about $430K of it eligible.
- A $600K factoring facility advancing 85% on eligible invoices, about $365K available at closing.
- Payoff letters from all three MCAs, with one funder offering a small early-payoff discount.
- First funding wired $236K in payoffs directly to the MCA funders, leaving about $129K for payroll and operations.
- All three UCC filings terminated; the factor took first position on receivables.
Outcome: Daily debits stopped 19 days after the first call. Factoring fees on the company’s 40 to 45 day payers averaged about 2.5% of invoice value, a fraction of the MCA cost, and payroll ran on schedule every week after closing.
A composite example for illustration, not a specific client, offer or promise of terms.
Questions people ask
Can factoring really pay off a merchant cash advance?
Yes, if your business has enough eligible B2B or government receivables to cover the payoffs. The factor buys your open invoices and wires each MCA its payoff at closing, which stops the daily debits. Businesses paid mainly by card or cash don’t have invoices to factor and need a different solution.
How do I get out of MCA debt without defaulting?
Keep paying while you arrange a refinance, request reconciliation in writing if your contract allows it, and get payoff letters before closing. Stopping debits or switching bank accounts without agreement often triggers defaults and lawsuits. A refinance that pays each MCA in full is the cleanest exit when your receivables support it.
What if my MCA balances are bigger than my receivables?
Then factoring can only cover part of the payoff. Options include paying off the most expensive advances first and letting a smaller one run off, adding owner cash, or negotiating a settlement with one funder. A funder can usually tell you within a few days what portion your receivables can support.
Will an MCA give me a discount for paying off early?
Some will, many won’t. It depends on the contract: some include an early payoff discount schedule, while others require the full purchased amount whenever you pay. Ask for the payoff letter in writing and compare it to the contract terms.
Do factoring companies work with businesses that have MCAs?
Many do, and MCA consolidation is a specialty for some. Funders need to see every MCA contract and get payoff letters from each one, because MCA liens on receivables must be released before a factor can take first position. Disclosing all advances up front speeds things up.
Is factoring cheaper than an MCA?
In most cases, substantially. Factoring fees commonly run about 1% to 5% of invoice value per 30 days, while stacked MCAs often carry effective annual costs well above 100%. The exact difference depends on your customers’ payment speed and your MCA terms, which the MCA vs. factoring tool will model for you.
Can an SBA loan pay off my MCAs instead?
Sometimes. SBA 7(a) loans can in some cases refinance existing business debt, but lenders look hard at cash flow and the reasons behind the MCA borrowing. Many owners factor first to stop daily debits and rebuild clean bank statements, then apply for SBA financing later.