Merchant cash advances (MCAs) are a form of alternative small business funding that emerged after the 2008 recession in response to a growing need for accessible financing. With a simpler application, faster turnaround, and more flexible approval requirements, merchant cash advances have made more working capital available to business owners who may not be approved by the Small Business Administration or other traditional lenders like banks and credit unions.

Despite being a practical and popular source of funding for over a decade, many myths and misconceptions persist about merchant cash advances. Many of these myths come from a simple lack of understanding about how merchant cash advances work. Couple their relative youth and ease of access with the sometimes secretive tactics used by disreputable lenders and aggressive brokers and it’s easy to see why merchant cash advances have developed a bit of a bad reputation.

In reality, MCAs are a regulated and legitimate form of funding, and they can be very helpful to small business owners looking for working capital, especially if you need funding quickly and your business processes a lot of credit card transactions.

To help clear up the confusion, we’re addressing 7 of the most common myths about merchant cash advances, including the beliefs that MCAs charge exorbitant fees, are unregulated and inherently predatory, and more. Let’s jump in.

Myth 1: Merchant cash advances are loans

Merchant cash advances are a form of small business funding, but they are not technically a loan. Technically, MCAs are a ?purchase of future receivables?, which means that your lender is essentially purchasing a portion of your future credit and debit card sales. You’ll receive a lump sum of cash up front similar to a traditional loan, but instead of adhering to a fixed repayment schedule over a specific term, a percentage of your daily or weekly credit card sales will be automatically deducted from your business bank account till your advance is repaid in full (plus any fees).

There are a couple of other key differences between how MCAs and loans function: with an MCA, the amount you receive is based on your projected future sales, while a traditional loan will base your funding amount on your credit history along with a number of other factors. And unlike traditional loans, MCAs do not require collateral.

Myth 2: MCAs have higher fees than other forms of funding.

The belief that MCAs are drastically more expensive than other forms of small business funding is one of the most common misconceptions about this form of alternative funding.

Instead of a standard interest rate like the SBA and banks charge, merchant cash advances will use something called a ?factor rate?. Unlike interest rates, which can compound as you pay off your loan, a factor rate is a simple decimal figure that shows how much ?extra? you will owe on the original amount of the loan. For example, if you borrow $1,000 at a factor rate of 1.3, you’ll owe $1,300. Your factor rate is determined based on your risk assessment, so the stronger your business’s financial history, the lower your rate should be.

Because of their flexible approval requirements, faster turnaround, and shorter terms, MCAs may come with higher borrowing costs than traditional term loans. However, this does not guarantee that an MCA will be costlier than other types of funding. Ultimately, the cost of your MCA will depend on your risk assessment and how quickly you are able to repay the advance.

Myth 3: Merchant cash advances are inherently predatory

Disreputable alternative lenders will approve 2nd, 3rd, and 4th merchant cash advances, making it easier for business owners to fall into a dangerous cycle of ?stacking? MCAs to pay off their existing MCA.