The Definitive MCA Glossary: Decoding the Language of Alternative Finance

The world of Merchant Cash Advances has its own language. For brokers, funders, and merchants alike, navigating this landscape requires fluency in a specific set of terms that are often misunderstood. Unlike traditional banking, the MCA space is built on a unique legal framework and operational model, giving rise to jargon that can be confusing and, if misinterpreted, costly. Understanding the precise meaning of terms like “factor rate,” “holdback,” and “reconciliation” is not just helpful—it’s essential for making informed decisions, structuring deals correctly, and avoiding common pitfalls.

This glossary is designed to be your go-to resource for demystifying the language of the MCA industry. Whether you’re explaining a contract to a client, underwriting a deal, or considering an advance for your own business, this exhaustive list will provide the clarity you need to operate with confidence.

ACH (Automated Clearing House) An electronic network that facilitates financial transactions between bank accounts in the United States. In the MCA industry, ACH is the primary method used to debit a merchant’s daily or weekly payments directly from their business bank account.

Advance Amount The lump-sum of capital that the funder provides to the merchant upfront. This is the actual cash the business receives. It is also sometimes referred to as the “Purchase Price.”

APR (Annual Percentage Rate) The total cost of borrowing expressed as a yearly rate. While MCAs are not loans and don’t have interest rates, calculating an equivalent APR can help merchants compare the high cost of an advance to traditional financing options.

Broker (or ISO - Independent Sales Organization) An individual or company that acts as an intermediary, connecting merchants who need funding with the funders who provide it. Brokers earn a commission for facilitating the deal.

Buy Rate The base factor rate a funder is willing to offer on an advance before a broker’s commission is added. This term is used internally between funders and brokers.

Confession of Judgment (COJ) A controversial legal clause, now banned or restricted in many jurisdictions, that a merchant signs as part of the MCA agreement. It allows the funder to obtain a court judgment against the merchant without a trial if the merchant breaches the contract, enabling swift collection actions like freezing bank accounts.

Factor Rate A decimal multiplier (e.g., 1.2 to 1.5) used to calculate the total repayment amount of an MCA. It is not an interest rate. To find the total amount owed, the advance amount is multiplied by the factor rate.

Funder (or Buyer) The company that provides the cash advance. In the legal structure of an MCA, the funder is “buying” a portion of the merchant’s future receivables.

Holdback (or Retrieval Rate) The fixed percentage of a merchant’s daily or weekly sales that is withheld to repay the cash advance. This amount typically ranges from 5% to 20% of daily revenue.

Merchant (or Seller) The business receiving the cash advance. In the MCA agreement, the merchant is “selling” a portion of its future revenue.

Merchant Cash Advance (MCA) A form of business financing where a company receives an upfront lump sum of cash in exchange for selling a portion of its future revenue at a discount. Legally, it is a commercial transaction, not a loan.

Origination Fee A fee charged by some funders to cover the costs of processing and setting up the cash advance. It is typically deducted from the advance amount before the funds are disbursed.

Paper Grades (A, B, C, D) An internal risk assessment system used by funders to categorize merchants. “A” paper represents the lowest risk (good credit, strong financials), while “D” paper is the highest risk. The grade affects the factor rate and terms offered.

Personal Guarantee A common clause in MCA agreements where the business owner agrees to be personally responsible for repaying the advance if the business defaults. This puts the owner’s personal assets at risk.

Position Refers to the priority order of funders when a merchant has multiple cash advances. The first funder is in “first position,” the next is in “second position,” and so on. Higher positions are significantly riskier for funders.

Purchased Amount (or Payback Amount) The total amount the merchant must repay to the funder. It is calculated by multiplying the Advance Amount by the Factor Rate.

Reconciliation (or Readjustment) A critical clause in a true MCA agreement that gives the merchant the right to have their payments adjusted if their revenue significantly declines. This ensures payments remain a fixed percentage of actual sales, which is a key legal distinction from a loan’s fixed payments.

Renewal An offer from a funder to provide a new advance to a merchant who has already paid back a significant portion (often 50% or more) of their existing advance.

Split Processing A repayment method where the funder partners directly with the merchant’s credit card processor. The processor automatically “splits” the agreed-upon holdback percentage from the daily credit card batches and sends it to the funder.

Stacking The practice of a merchant taking on an additional cash advance from a different funder while still having an outstanding balance with another. This is highly risky and often constitutes a breach of the original MCA agreement.

Term Length The estimated time it will take to repay the advance. Unlike a loan, an MCA does not have a fixed maturity date because repayment speed is tied to sales volume. However, it is typically short-term, ranging from 3 to 18 months.

UCC Lien (Uniform Commercial Code) A legal notice filed by a funder that gives them a security interest in the merchant’s future receivables. It establishes the funder’s priority to collect and prevents the merchant from selling those same receivables to another party.

Underwriting The process funders use to evaluate a merchant’s application and assess the risk of providing an advance. This involves analyzing bank statements, credit card processing history, and other business performance data.

Mastering this vocabulary is the first step toward navigating the MCA industry with greater confidence and success. As the market continues to evolve with new technologies and regulations, a clear understanding of these foundational concepts will remain an invaluable asset for all industry participants.

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