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Access to capital is one of the biggest challenges for growing businesses, with 81% of small business owners saying that it was hard to secure affordable funding, according to Goldman Sachs data. Whether you’re managing inventory, launching a new product, or bridging seasonal cash flow gaps, you may need cash right away that doesn’t require years of financial history for loan approval. One solution is merchant financing—a flexible way for ecommerce sellers to borrow quickly.
Learn more about merchant financing, how it compares to traditional term loans, and which lenders to consider.
What is merchant financing?
Merchant financing, also known as a merchant cash advance (MCA), is a type of business funding where a lender provides money to a business in exchange for a portion of its future sales, particularly credit and debit card sales. The lender then collects a fixed percentage of the seller’s daily or weekly revenue until the balance is fully repaid, usually within a set time period.
This type of financing is common among ecommerce businesses, restaurants, retail stores, and other businesses with consistent transaction volume. Since repayments are tied to sales, merchant financing can feel more manageable than a fixed-rate loan payment for some businesses. This can be especially beneficial during slow seasons, as lower sales result in lower repayment amounts (although some lenders set minimum daily or weekly repayment amounts).
Merchant financing uses factor rates instead of traditional interest rates. A factor rate is expressed as a decimal (like 1.15 or 1.2) that determines your total repayment at the outset. To figure out what you will owe, you simply multiply the factor rate by the amount you’re advanced. For example, a $10,000 advance at a 1.2 factor rate means you will repay $12,000 in total.
The factor rate will often be higher than the APR on a traditional business loan. Let’s assume again that your $10,000 advance has a factor rate of 1.2, and your total payback amount will be $12,000. If your monthly sales are $8,000 and the lender takes a 10% cut each month, you’ll pay back the $12,000 in about 15 months. This means your equivalent APR is around 30% versus the typical 7% to 8% for a term loan.
How does merchant financing work?
Merchant financing is built around a simple idea: Your sales history determines whether you qualify for financing, how much you can borrow, and your repayment schedule. The process generally follows three steps:
1. Application and underwriting. After you submit an application, the lender reviews your recent sales history, typically by integrating with your payment processor. Generally, the more you sell, the more you can borrow.
2. Approval and funding. If approved, you receive funds in your business bank account. Many merchant financing providers can deliver funds the same business day.
3. Repayment. Lenders typically collect a fixed percentage of your daily debit and credit card transactions until you’ve repaid the full amount, plus a set fee. This feature offers flexibility because payments adjust based on sales volume.
Merchant financing pros and cons
Some of the pros of merchant financing include:
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Quick approval. Since merchant financing doesn’t require an in-depth assessment of your business by the lender, the time from application to approval is minimal. In some cases, merchant financing is approved the same day as the application.
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Flexible repayment. Payments are based on your daily sales, so you pay less when your sales decline or during seasonal lulls in business.
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Easier qualification. For small business owners who need cash quickly and don’t have adequate collateral or a high credit score, merchant financing is easier to secure than a term loan or business line of credit from a bank or other lender.
But merchant financing does have some downsides, including:
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Higher costs. Total repayment cost is often higher than with conventional small business loan products. Plus, there is no benefit to repaying the advance early, as there is with paying off a term loan ahead of schedule and saving on interest costs.
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Regular deductions. Depending on the terms, merchant financing comes with a weekly or daily repayment schedule that can eat into cash flow.
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Minimum repayment requirements. Some lenders require the business to pay a periodic minimum fee or adhere to set repayment deadlines, which can be difficult to meet if revenue is lower than the amount due.
Merchant financing vs. traditional term loans
Merchant financing and term loans are two types of financing that provide capital to pay for a range of business expenses. Both serve the same purpose—funding a business—but the repayment, underwriting, and cost structure are very different.
Many banks, credit unions, and online lenders offer traditional term loans. The business owner typically receives a lump sum and repays it over a few years through monthly installments with a standard interest rate. Eligibility and borrowing limits heavily depend on the business’s financial statements, average monthly revenue, collateral, and personal and business credit history. Some traditional bank loans require you to use the funding for a specific purpose, but not all come with these restrictions.
With merchant financing, the business owner qualifies based on recent sales performance instead of credit, overall business health, or available collateral. The lender then takes a cut of the business’s daily debit or credit card sales, plus fees, until the loan is repaid. Business owners can use the funds for any business needs.
3 merchant financing lenders to consider
Not all merchant financing providers operate the same way. Some integrate directly into payment platforms, while others offer advances through third parties. Here are some MCA providers that serve ecommerce businesses.
1. PayPal Working Capital
PayPal Working Capital is available to business owners with a PayPal Business or Premier account open for at least 90 days. To qualify, you need to have processed at least $15,000 in PayPal sales during the past 12 months ($20,000 for Premier accounts).
You can borrow as much as $300,000 and will receive a fixed fee calculated based on the amount you request and the percentage of your PayPal sales that will go toward repayment. If approved, funds are deposited in your PayPal account, often within 24 hours. Repayments are automatically taken as a percentage of each PayPal sale, with a minimum payment amount due at least every 90 days.
2. Stripe Capital
Stripe Capital is available to businesses that have used Stripe for at least 90 days and have processed at least $1,000 in average monthly sales over the past three months. Your transaction history, customer base, and dispute rate will determine the amount you can borrow, as well as a flat financing fee that’s repaid over the life of the advance.
If you’re eligible, the money will be deposited into your Stripe account, typically the next business day. Payments are deducted from a percentage of your daily sales.
3. Square Loans
Square Loans allows you to apply for as much as $350,000, as long as you have used the payment processor for at least 20 days during the past year. Square sets up automatic deductions from your daily debit and credit card sales until the balance and fee are repaid. The size of your loan offer generally depends on your sales volume. Businesses that have processed at least $10,000 or more in a year are more likely to qualify for an offer.
Merchant financing FAQ
How does a merchant loan work?
A merchant loan (or merchant cash advance) gives your business capital now in exchange for a portion of your future sales. Instead of paying a fixed monthly amount, you repay a percentage of daily or weekly credit and debit card transactions. The cost of the advance is determined by a factor rate rather than a traditional interest rate.
What is the difference between a merchant loan and a business loan?
A merchant loan bases repayment on sales performance. A traditional business loan uses fixed monthly payments and often requires stronger credit, collateral, and extensive financial documentation. Lenders approve merchant loans faster than conventional loans, but they come with factor rates that may make the financing more expensive.
Who gives a merchant loan to a merchant?
A wide range of providers offer merchant loans, including ecommerce platforms like Shopify, payment processors like Stripe, online lenders, and merchant cash advance companies. Some traditional financial institutions also offer merchant financing. These providers review your transaction data to evaluate eligibility and automate repayment.
*All loans through Shopify Capital Loans are issued by WebBank. Offers are subject to change based on several factors including your store’s performance and the review of your financial information. Shopify Capital Loans must be paid in full within 18 months, and two minimum payments apply within the first two six-month periods. Offers to apply do not guarantee funding. Repayments are made based on a percentage of daily sales.
