5 Things to Know Before Taking a Cash Advance

A merchant cash advance (MCA) isn't complicated once you understand how it works. But too many business owners sign agreements without fully understanding the terms — and that's when things go wrong. Here are five things you should know before you take one.

1. A cash advance is not a loan

This is the most important distinction. A loan is a fixed debt with a defined interest rate, regulated by banking law. A cash advance is the purchase of a portion of your future sales at a discount.

You receive a lump sum today. In exchange, the funder collects a fixed amount over time — typically via daily or weekly ACH from your business bank account. Because it's structured as a purchase of future revenue, it isn't subject to the same interest rate caps as traditional loans.

This matters because the cost of capital is usually expressed as a "factor rate" (e.g., 1.30x) rather than an APR. A factor rate of 1.30 means you pay back $1.30 for every $1.00 you received.

2. Repayment is tied to your revenue

Traditional loan payments are fixed — same amount every month regardless of how business is going. A cash advance typically has a fixed daily or weekly payment drawn from your bank account.

Some funders offer "true" revenue-based repayment, where the percentage taken adjusts with your sales. These are more flexible but less common. Most MCAs use a fixed daily/weekly draw.

Ask your advisor exactly how repayment works before you sign. The Luma team will walk you through the full structure before any commitment.

3. They're right for specific situations — not every situation

A cash advance works well when:

• You need capital fast (days, not weeks)
• You have consistent revenue that supports the repayment
• The opportunity or expense has a clear return
• You've been in business at least 6 months

A cash advance is not ideal for:

• Replacing chronic cash flow losses
• Funding speculative investments
• Paying off other high-cost debt without a plan

Be honest with yourself about which category you're in.

4. What lenders look at — and what they don't

For most MCAs, the primary underwriting criteria are:

• Monthly revenue (typically $10K+ minimum)
• Time in business (6+ months is standard)
• Bank statement consistency — how smooth is your cash flow?
• Credit score — important, but not the deciding factor

Unlike a bank loan, you don't need collateral, a business plan, or perfect credit. Lenders want to know you generate consistent revenue that can support the repayment.

5. How to compare options

Not all cash advances are created equal. When comparing offers:

• Look at the total payback amount (funded amount × factor rate), not just the payment size
• Check whether there are origination fees, admin fees, or early payoff penalties
• Ask how long you'll be in repayment — shorter isn't always better if payments are too aggressive
• Ask if they share deals with multiple funders (brokers) or if they fund directly

Luma is transparent about every fee before you sign. We'll show you the full cost in plain language — no surprises.

If you're ready to explore what you qualify for, checking takes about a minute and won't affect your credit score.