Merchant Cash Advances: High cost, few rules?

Access to credit continues to be a common challenge for small firms in the United States, particularly for traditionally underserved communities. Research on small business lending consistently shows that minority-owned firms are approved for bank loans at significantly lower rates than their white-owned counterparts, are more likely to be discouraged from applying, and receive smaller loan amounts when they do receive credit. Data from SFD USA fits that pattern: over 70% of our sample are minority business owners, and over one-third were denied credit in the last 12 months. 

One of the barriers these firms face is that traditional lenders like banks and CDFIs operate within regulatory frameworks and risk management structures that can make processes slower, require more documentation, and limit the amount or type of credit they will extend.

In particular, banks do little short-term liquidity lending, instead offering collateralized loans. What small firms need is cash to cover short gaps in revenue: a JPMorgan Chase Institute study of small business cash balances found the median firm holds only 27 days on hand. This gap in the market has provided a space for faster and more readily accessible forms of credit. Enter: Merchant Cash Advances. 

Merchant cash advances have been around since the 1990s and began to gain traction in the early 2000s. The 2008 financial crisis accelerated that growth, as lenders tightened underwriting and denied credit to small businesses at much higher rates. By 2009, the MCA industry was expanding rapidly, providing credit that was expensive but easy to get. Technology widened access further, as providers moved to point-of-sale systems and other platforms. One market research estimate put the industry’s worth at $20 billion in 2024.

Data from the Federal Reserve's Small Business Credit Survey shows that minority-owned firms rely on MCAs at higher rates than white-owned firms. That reliance suggests that MCAs are filling a genuine and largely unmet need—and that banning them outright, or regulating them out of the market—would leave many small firms with no source of working capital at all. 

Because MCAs are structured as a purchase of future receivables rather than a loan, most of the rules that govern lending—interest rate caps, disclosure requirements, borrower protections—don't apply to them. Federal and state regulators have been deciding whether to extend them, and arriving at different answers.

The legal void of MCAs 

MCAs are not legally classified as loans because there is no unconditional promise to repay.  A provider advances a lump sum in exchange for a percentage of the firm's future sales, projected from past revenues and collected daily or weekly, often by automatic debit. In theory, if sales stop, so does repayment. 

This has allowed MCA providers to charge what would otherwise be considered usurious interest rates with little regulatory consequence, until recently. The Federal Reserve has found that, depending on the speed of repayment, equivalent APRs may exceed 80% or even rise to triple digits. Yet for many small firms, and especially those owned by people of color, MCAs are not a last resort; they are often the only option.

The high cost of MCAs

Merchant cash advances don't charge interest. Instead, they use a factor rate: a flat multiplier applied to the amount advanced. A $50,000 advance with a factor rate of 1.35 means the business owes $67,500 total, regardless of how quickly it repays. Unlike a traditional APR, this cost is fixed upfront and doesn't shrink with early repayment, so paying faster doesn’t save money.

The factor rate can also make an MCA look cheaper than it is. Repayment starts almost immediately through daily remittances, so the business has the full $50,000 only at the outset, but pays the full $17,500 regardless. Repaid in fixed daily remittances over six months, that cost works out to an estimated APR of roughly 125% if repaid over six months. The faster the advance is repaid, the higher that figure climbs.

A patchwork of regulation 

Until recently, MCA providers operated with almost no regulatory oversight. That is starting to change, but the regulatory landscape that is emerging is fragmented and inconsistent.

The Consumer Financial Protection Bureau (CFPB) under the Biden administration determined that MCAs constitute “credit” under the Equal Credit Opportunity Act. That would have subjected them to consumer protection requirements and, critically, required providers to report data on the demographics of their borrowers under the Section 1071 small business lending data collection rule. 

That rule was contested by the Revenue-Based Finance Coalition (an MCA industry trade group), which sued the CFPB to block its implementation. In May 2026, the CFPB finalized a rule excluding MCAs from Section 1071 altogether—a decision we examined in more detail here. Without data collection requirements, researchers, regulators, and policymakers will have limited visibility into who is actually borrowing through MCAs, at what cost, and with what outcomes. 

With the federal government stepping back, regulation has fallen to the states. Since 2018, several states have enacted commercial financing disclosure laws that require MCA providers to disclose key cost metrics upfront, including the total amount to be repaid, the fees involved, and an estimated APR. California led the way, and New York, Utah, Virginia, Georgia, Connecticut, Kansas, Missouri, Texas, Louisiana, and Florida have since followed, each with different thresholds, definitions, and compliance timelines. 

These laws are meant to give small firm owners better information before they sign. In theory that’s a good thing, but in practice questions remain about whether disclosure alone is enough when owners are time-constrained, financially stressed, and often comparing products that are structured very differently. Research on consumer financial disclosures more broadly suggests that disclosure requirements rarely change consumer behavior.

Case by case

With federal rules retreating and state laws uneven, enforcement agencies have been the most active. In January 2025, the New York Attorney General announced a $1 billion settlement with Yellowstone Capital—one of the largest MCA providers in the country—following allegations that it had made illegal high-interest loans disguised as merchant cash advances to over 18,000 small businesses, with rates reaching up to 820% annually. The contracts described repayment as contingent on future sales; in practice, according to the complaint, the company took fixed amounts daily over 60- to 90-day terms.

At the federal level, the Federal Trade Commission has also stepped in. In 2024 it secured a permanent industry ban and a $20.3 million judgment against the owner of RCG Advances for deceiving small businesses and weaponizing “confessions of judgment” (clauses that let a provider obtain a court judgment and seize a firm’s assets without notice) in cases of alleged default.

Where this leaves small firms

The rise of MCAs is a cautionary tale that should leave us asking why so many small firms have no viable alternative. The firms that bear the greatest risk are those with the fewest options: the smallest businesses, in the most under-resourced communities, with the least experience navigating complex financial products. Combating predatory practices is important. But so is understanding and addressing the gap in credit that sends these firms to MCAs in the first place.