# Revenue Based Financing vs MCA: How the Terms Differ

- Author: TrueBankFlow (https://www.truebankflow.com)
- Published: 2024-10-27
- Updated: 2024-10-27
- Category: MCA deals and funding
- Canonical: https://www.truebankflow.com/blog/revenue-based-financing-vs-mca

> Revenue based financing vs MCA compared: payment as a share of revenue, caps, the underwriting data used and which businesses each product suits.
Revenue based financing vs MCA comes down to how payments are taken and what they track. Revenue based financing usually collects a monthly share of total revenue up to a fixed repayment cap. An MCA buys future receipts and collects daily or weekly. Funders of each read different data, and each suits a different kind of business.

## Revenue based financing vs MCA in one comparison table

Revenue based financing and an MCA both tie repayment to sales, but they differ in payment frequency, how cost is stated, the term and the data used to decide. The table below sets out the typical version of each. Individual providers vary, so treat every row as a common pattern, not a rule.

| Term | Revenue based financing (typical) | Merchant cash advance (typical) |
| --- | --- | --- |
| What is bought or lent | Often structured as a loan repaid from revenue | A purchase of a share of future receipts |
| Payment frequency | Monthly | Daily or weekly |
| Payment basis | A percentage of the prior month's revenue | A fixed estimate of a percentage of receipts, or a split at the processor |
| Cost stated as | A repayment cap, a multiple of the amount funded | A factor rate on the amount advanced |
| Typical term | One to several years | Several months to about a year and a half |
| Underwriting data | Accounting, billing and payment platform data, plus bank records | Bank statements and processor statements |
| Common users | Subscription software, e-commerce, recurring-revenue firms | Restaurants, retail, service businesses with daily card sales |
| Speed | Days to weeks | Often days |

The biggest practical difference is cadence. A business paying once a month on last month's revenue has a very different cash cycle from one losing a slice of every day's deposits. Margin matters too: revenue based financing is most often offered to businesses with high gross margins, where a share of revenue is affordable.

The second difference is legal form. Many revenue based financing providers document the deal as a loan with variable payments. An MCA is usually documented as a purchase. That affects which rules apply, how default works and how the deal is disclosed. Disclosure rules can still reach both when payments track sales, which is covered under repayment caps below.

## How does the revenue share in revenue based financing differ from an MCA holdback?

The revenue share in revenue based financing is a monthly percentage of total revenue, recalculated each month from reported figures. An MCA holdback is a percentage of daily receipts, usually collected as a fixed daily debit or as a split of each card batch. The first moves with monthly results, the second with day-to-day deposits.

With revenue based financing, the business reports revenue, often through a connection to its billing or accounting system, and the provider debits the agreed share once a month. If revenue drops 30%, the next payment drops 30%. Payment shares commonly sit in single digits as a percentage of revenue, although every provider sets its own.

With an MCA, there are two common collection methods. A split at the card processor takes a set share of each card settlement before the rest reaches the merchant, which tracks sales closely. For how that works and when funders choose it, see [MCA split funding and how processor splits collect payments](/blog/mca-split-funding). A fixed ACH debit takes the same amount every business day, estimated from past receipts, and only tracks sales if the merchant asks for a reconciliation.

The holdback percentage on an MCA is usually higher than the revenue share on revenue based financing, because the term is shorter and the full payback has to come in faster. A merchant paying 12% of every day's card sales feels it in daily cash. A software company paying 5% of monthly revenue feels it once a month.

## Repayment caps in revenue based financing and MCA factor rates

A repayment cap in revenue based financing is the total the business repays, stated as a multiple of the amount funded, such as 1.4 times. An MCA factor rate does the same job: payback equals the advance times the factor. In both, total cost is fixed up front, and the time to repay it is not.

Because the total is fixed and the term floats, both products share a quirk. Faster revenue means faster repayment, which means a higher annualized cost for the same dollar charge. Slower revenue stretches the term and lowers the annualized cost. That is the reverse of a fixed-rate loan, where paying early saves interest.

A worked example puts the same $50,000 through each product. All figures are invented for illustration.

| Example | Revenue based financing | Merchant cash advance |
| --- | --- | --- |
| Amount funded | $50,000 | $50,000 |
| Cap or factor rate | 1.40 | 1.35 |
| Total repaid | $70,000 | $67,500 |
| Payment basis | 6% of monthly revenue | about $482 per business day |
| Revenue assumed | $100,000 a month | $100,000 a month, 21 business days |
| Payment per month | $6,000 | about $10,125 |
| Estimated time to repay | about 11.7 months | about 6.7 months |

On these numbers the MCA has the lower total cost but repays in a little over half the time, so its annualized cost is higher. The two cannot be compared on cap or factor alone. Each has to be converted to an annual rate using the same estimated revenue.

New York's disclosure rule does this conversion for both. [New York's 23 NYCRR Part 600 commercial financing disclosure regulation](https://www.dfs.ny.gov/industry_guidance/regulations/final_financial_services/rf_finservices_23nycrr600_text) sets out disclosures for sales-based financing, where payments are calculated from the recipient's sales, income or receipts, and requires an estimated annual percentage rate, total payment, estimated payment and estimated term. Under its historical method, a provider estimates future sales from a fixed historical period that must be at least four and at most twelve months, and must use that period consistently. The rule applies to recipients whose business is principally directed or managed from New York.

## Underwriting data for revenue based financing compared with MCA statements

Underwriting data for revenue based financing usually comes from accounting, billing and payment systems connected directly, plus bank records. An MCA funder usually decides from three to six months of bank statements and, for split deals, processor statements. The first reads revenue quality, the second reads cash movement in the account.

A revenue based financing provider often looks at:

- **Recurring revenue.** Monthly recurring revenue, its growth and the share from existing customers.
- **Churn and retention.** How much revenue leaves each month and whether customers expand.
- **Gross margin.** Whether a share of revenue is affordable after cost of sales.
- **Bank records.** Cash on hand and burn, to check that the business will last the term.

An MCA funder reads the bank statements for:

- **Monthly deposits** after removing transfers and loan proceeds.
- **Daily balances** and the lowest days in each month.
- **Existing positions** from other funders.
- **NSF items and negative days.**

The documents an MCA application needs, from the application form to voided checks and statements, are listed in [merchant cash advance application requirements](/blog/merchant-cash-advance-application-requirements).

Both kinds of provider also run identity and sanctions checks on the business and its owners before funding. That step is the same regardless of product, and [OFAC screening for loans and other financing](/blog/ofac-screening-for-loans) explains what the check covers and when it runs.

For the bank-statement side of either review, [TrueBankFlow](/) separates transfers from deposits, groups recurring income by source and shows monthly trends, so an analyst can see quickly whether revenue is steady, growing or slipping.

## Which businesses suit revenue based financing and which suit an MCA?

Revenue based financing suits businesses with predictable, high-margin revenue that grows month over month, such as subscription software or established online stores. An MCA suits businesses with steady daily card or cash receipts that need money quickly, such as restaurants, salons and retail shops, and can absorb a daily payment.

Margin is the first filter. A business with 80% gross margins can give up 6% of revenue without strain. A restaurant with thin margins giving up a share of revenue is giving up a much larger share of profit. MCA funders account for this by sizing the holdback against the account's actual balances, not against revenue alone.

Revenue pattern is the second filter. Monthly invoiced revenue matches monthly payments. Daily card receipts match daily collection. Mismatching the two creates a cash squeeze: a software company with monthly billing and a daily debit will run low between billing runs.

Speed and paperwork are the third. An MCA can fund in days on bank statements. Revenue based financing usually requires connecting several systems and a longer review, and some providers want a minimum level of recurring revenue before they look.

A short guide for an ISO or broker:

- **Recurring monthly revenue, high margin, growing:** revenue based financing first.
- **Daily card sales, moderate margin, needs cash this week:** an MCA is the more common fit.
- **Seasonal sales:** whichever product adjusts to sales, a revenue share or a true processor split, rather than a fixed daily debit.
- **Thin margin, irregular sales:** neither may fit; see the next section.

## When neither revenue based financing nor an MCA fits the business

Neither revenue based financing nor an MCA fits a business with thin margins and lumpy revenue, a business that needs money for a long-lived asset, or one whose bank account already carries several advances. In those cases, a term loan, equipment financing or a line of credit is often cheaper and better matched.

Signs that a revenue-linked product is the wrong tool:

- **The funds buy equipment or property.** A long-lived asset is better financed over its useful life, with the asset as collateral.
- **Margins cannot absorb the share.** If the revenue share or holdback exceeds what the business earns after costs, every payment deepens the hole.
- **Revenue is concentrated in a few large invoices.** Invoice financing or factoring may match the cash cycle better.
- **The account is already stacked.** Adding another sales-linked payment on top of existing positions is how merchants end up unable to pay any of them.
- **The business qualifies for bank credit.** A conventional loan at a lower annual rate will usually cost less over time.

An honest comparison names these cases. Choosing the cheaper product for the wrong job still costs more than choosing the right one, and the decision is easier when the bank statements show clearly what the business brings in each month and what is already committed.