The 3 Reasons Why MCA Debt Builds Up Quickly
Like most financing options, a merchant cash advance (MCA) has its pros and cons.
One disadvantage is that its inherent features and structure can lead to a buildup of MCA debt. Instead of helping you ride out a rough patch, the high costs further drain your cash flow, leading to a cycle of repeated borrowing. This causes a debt spiral that’s hard to escape and has contributed to some companies filing for bankruptcy.
Government agencies are even taking note. The California Department of Financial Protection & Innovation sent an advisory to small businesses in April 2025 asking them to report if they’d “fallen prey to unfair, deceptive, or abusive practices in connection with … a merchant cash advance.” In New York, the attorney general filed a lawsuit against three MCA companies for predatory lending practices.
In this article, we’ll take a closer look at the reasons MCA debt builds up and provide you with alternative financing solutions to consider instead.
How MCA Debt Builds Up
All debt comes with a certain amount of risk and needs to be managed well. However, some types of debt are riskier than others and can lead to credit cycles that are hard to escape. Merchant cash advances are one of the financing options small business owners should be careful with, as their structure can result in a buildup of MCA debt.
Here are three reasons why.
1. High Costs
Instead of charging an interest rate, MCA providers impose a factor rate that’s usually between 1.1 and 1.5. The factor rate is multiplied by the amount of the advance to determine how much the borrower’s repayment will be. For example, if you receive $250,000 with a 1.5 factor rate, you’d owe $375,000 in total MCA payments. That’s 50% more than you borrowed!
How can MCA providers get away with these payment terms? They aren’t subject to usury laws — which put a cap on interest rates — like most lenders. That’s because an MCA is not considered a business loan. Instead, the provider is purchasing future sales or receivables.
One of the legal differences between a loan and an MCA is that loans have a fixed repayment period, such as a five-year term. If an MCA agreement sets a specific due date in the repayment terms, that’s a red flag.
In fact, New York State Attorney General Letitia James secured a $77 million judgment against three merchant cash advance companies for crossing the line. Attorney General James found they were “illegally loaning money to small business owners at astronomically high interest rates.”
In one example, a small business received an upfront lump sum of $10,000 and was required to repay $19,900 within 10 days.
2. Cash Flow Drain
MCAs are often seen as a solution to cash flow strains, but rather than solve the problem, they tend to exacerbate it and create a precarious financial situation.
We’ve already discussed the high costs, which certainly play a part in the cash flow drains. The other contributing factor is the repayment schedule.
The MCA provider will take a percentage of each day’s debit and credit card sales, so business owners are essentially having their revenue garnished by the MCA lender. That means cash flow continues to be tight, and business owners still feel like they're scrambling to catch up.
3. MCA Stacking
Both the high costs and cash flow drain can lead to MCA stacking, where the borrower will take out more merchant cash advances in an attempt to resolve their business debt. This kind of debt spiral can lead to more serious financial instability and even bankruptcy.
High Sources Inc., a Tampa Bay-based business, had to file for Chapter 11 when it racked up millions of dollars in debt to over a dozen MCA providers. Image Locations Inc. in California also cited MCA debt as one of the reasons for its Chapter 11 filing. Those are just two examples of how MCA stacking can cause debt to build to an unsustainable level.
Can You Refinance an MCA With an SBA Loan?
No, you can no longer use SBA 7(a) loans to refinance merchant cash advance debt, as of June 1, 2025. SOP 50 10 reads, “Merchant cash advances and factoring agreements are not eligible for refinancing.”
While the Small Business Administration hasn’t commented on this change, it sends the message they recognize the risk of MCA debt cycles. Recently, the SBA has experienced an increase in default rates, which resulted in tightened underwriting standards in 2025. The new refinancing rules are likely related.
How to Avoid MCA Debt
The best way to avoid MCA debt is to choose business financing options with more favorable terms and lower APRs. Funding that offers a lower cost of borrowing can be used strategically to overcome cash flow gaps, rather than make them worse.
Here are some options to consider.
Term Loans
Not only are term loans subject to state usury laws, which protect you from unchecked interest rates, but they also come with a stable repayment structure. Whether you take out a short-term working capital loan or a longer-term traditional loan, you’ll have fixed weekly or monthly payments that you can plan for.
Business Lines of Credit
A business line of credit is a type of revolving credit that lets you make withdrawals when you need them, up to a defined credit limit. It works like a cash reserve that you have on hand to cover unexpected expenses or temporary cash flow gaps.
B2B Buy Now, Pay Later
There are actually two ways B2B buy now, pay later (BNPL) programs can help you avoid MCA debt, depending on whether you’re the buyer or the seller.
If you’re the buyer and BNPL is offered as a payment option, you can receive net terms or an extended installment plan for your purchase. This allows you to conserve your cash flow in the near term without the need for a high-risk MCA.
If you’re the seller, you can offer BNPL as a payment method, which will give your customers buying power and shorten your accounts receivable cycle. With traditional net terms, you’re left waiting on your cash flow, but when you offer net terms with a BNPL partner, like BackdPayments, you get your money upfront while still being able to give your customers the flexibility they need.
Don’t Get Caught Up in High-Cost MCA Debt
Not all financing is bad; it’s just not all created equal. While the high costs and repayment structures of MCAs can lead to a buildup of debt, other funding options can be used strategically to cover seasonal gaps or invest in your company’s growth.
Backd is an alternative lender that offers fast, flexible financing for small businesses. Choose from working capital products like:
Business Term Loans* of up to $1.5 million and terms extending up to 24 months
Business Lines of Credit of up to $1 million and terms up to 12 months
Or partner with BackdPayments to give your customers the flexibility of buy now, pay later options at checkout or on their invoices.
Apply now** and receive a funding offer within as little as 6 hours.***
*Loans are decisioned and funded by one of Backd's lender partner banks.
**Your application, including the amount, cost, and approval, is subject to review and is not guaranteed. Terms and conditions subject to change without prior disclosure or notice.
***Decisions and funding may take additional time and not be same-day. Additional information may be required. Time to receive funds varies based upon your financial institution's receiving schedule and operating hours.
