Getting out of a merchant cash advance

On this page

• The factor rate hides a high APR
• Daily debits take a share of your sales
• A renewal can charge you twice
• Read the contract for these terms
• Four exit routes, and what each can do
• SBA can refinance an advance only in a narrow case
• What to avoid while you exit
• When an advance is a bad idea, and when it is not

The factor rate hides a high APR

A merchant cash advance has no interest rate, so its cost hides in the factor. It buys a fixed amount of your future receipts. You repay the advance plus a factor, which FTC staff report is often between 20% and 50% of the amount. Payments may be daily, and the FTC notes that daily payments may rise or fall with daily sales.

Convert it. Suppose you take $50,000 at a factor of 1.35. You owe $67,500, so the cost is $17,500. Suppose you repay in 126 daily payments of $535.71, about six months of business days. The APR for that pattern is about 126%, counting 252 business days a year.

The same factor over a shorter time costs more per year. Repaid in about three months, the same $17,500 works out to an APR near 250%. Repaid over about a year, it is near 63%. FTC staff note that these products can carry estimated APRs in the triple digits.

For a slower walk through the conversion, see how to find the true APR of a merchant cash advance.

Daily debits take a share of your sales

Divide the daily debit by your daily sales to see its weight. Suppose sales run $2,500 a day and the debit is $536. The debit takes about 21% of sales. If sales fall to $1,500 a day, the same debit takes about 36%.

That is why reconciliation matters. Where a contract provides it, reconciliation adjusts the debit to your actual receipts. Where a contract has no such clause, the debit may stay fixed while your sales fall.

A renewal can charge you twice

A renewal can charge you a second fee on money you already owe. It pays off the old advance with part of a new one. Suppose you still owe $20,000 and renew with a $40,000 advance at the same 1.35 factor. The funder keeps $20,000 to clear the old balance and sends you $20,000.

You now owe $54,000. That is $34,000 more than before, for $20,000 of cash. The extra cost is $14,000, or 70% of the cash you received. Half of it is a second fee on the $20,000 you already owed.

New York's disclosure rules address this. A covered sales-based financing provider must tell you whether a renewal includes unpaid fees from the old advance. The rule calls this double dipping (23 NYCRR 600.6).

Read the contract for these terms

Before you choose an exit, find these terms in your contract:

• The purchased amount and the price. The gap between them is your cost.
• The payment. A fixed daily amount or a percentage of receipts.
• Reconciliation. Whether, how and how fast payments adjust when sales fall.
• Default triggers. Missed debits, a closed account or a second advance.
• Guarantees. Whether the owners guarantee performance or repayment.
• Liens. Whether the funder files a lien on your receivables or other assets.
• Confession of judgment. Whether you agree in advance to a court judgment.
• Renewal and payoff terms. What an early payoff or a renewal costs.

Four exit routes, and what each can do

1. Pay it off as written. This avoids new fees and legal risk when you can afford the payments. Check whether paying early reduces the fee. A fixed factor fee may not shrink if you pay sooner.
2. Ask for reconciliation. Some contracts promise to adjust payments to your actual receipts. FTC staff report a concern that some funders skip the promised adjustments when sales fall. Send your request in writing and keep proof.
3. Negotiate a payoff. Some funders will take a lump sum below the full balance. None must. Your contract and a lawyer licensed in your state decide how hard you can push.
4. Refinance with a term loan. A bank or other term loan can pay off an advance. Compare total dollars before and after. SBA allows it only in a narrow case.

SBA can refinance an advance only in a narrow case

SBA can refinance an advance only after it has become something else. The rule is in SOP 50 10 8.1, Appendix 14, Para. A.3. A merchant cash advance is eligible for refinancing only if the agreement has been converted to a term loan, has amortized for at least 24 months and no new agreements followed; an active agreement is not eligible.

An active advance blocks an SBA refinance. A lender also looks for advances when it reviews your bank statements. On 7(a) Small loans, the lender must review two months of bank activity. That review confirms debts such as merchant cash advances (SBA Information Notice 5000-877673).

Plan for this. If an SBA loan is your goal, let the advance finish or convert. Avoid taking new advances in the meantime. See the answer on getting an SBA loan with an active advance.

What to avoid while you exit

• Stopping payments or closing the account without advice. Read your contract first. Closing or changing the deposit account can be a default.
• Signing a renewal or settlement you have not read. Look for a confession of judgment. The FTC alleged that one funder used confessions of judgment, which let it obtain uncontested judgments, to seize personal and business assets. The FTC announced on October 30, 2023 that a court had granted it summary judgment and permanently banned the funder's owner from the industry.
• Stacking a second advance to pay the first. Each advance adds a daily withdrawal, so your cash flow shrinks while the cost grows.
• Skipping a lawyer. Have an attorney licensed in your state review the contract before you stop paying or sign a settlement.

When an advance is a bad idea, and when it is not

An advance is a bad idea in three cases:

• The use pays back slower than the advance does. A ten-year asset needs a ten-year loan.
• Your return is smaller than the cost. If $10,000 of advance costs $3,500 and the use earns $2,000 in gross profit, you lose $1,500.
• You already have one. Each added advance adds a daily withdrawal.

It can work for a short, certain gain. A $15,000 repair that restores $40,000 of revenue can justify a high APR, because the money is outstanding briefly.

Few firms use one. In the Federal Reserve's 2025 survey, 7% of employer firms regularly used a merchant cash advance. Separately, 8% applied for one in the prior 12 months.