If you've shopped for business funding, you've probably been offered both a line of credit and a merchant cash advance (MCA). On the surface they sound alike: quick cash, light paperwork, money in days. But the way they're priced is completely different — and that difference can cost you tens of thousands of dollars on the same amount of capital.
Here's how to tell them apart before you sign anything.
What a line of credit actually is
A business line of credit is revolving capital that sits on standby. You draw what you need, pay simple interest only on the amount you've drawn, and redraw as you pay it down — like a credit card, but with cash to your bank account. When you're not using it, it costs you little or nothing.
Because it's simple interest, the math is honest: borrow $50,000, pay it back over a few months, and you pay interest on the shrinking balance — not on the full amount the whole time.
What a merchant cash advance actually is
An MCA isn't a loan at all — it's the sale of your future revenue at a discount. A funder gives you a lump sum today and collects a fixed total back, usually through daily or weekly debits from your bank account or card sales.
The cost is quoted as a factor rate, not an interest rate. A 1.4 factor on $50,000 means you repay $70,000 — full stop, no matter how fast you pay it off. Pay it back in four months and that $20,000 cost becomes an eye-watering effective APR.
The trap: factor rates hide the true cost. "1.4" sounds small. Repaying $70,000 on $50,000 in a few months does not.
The honest comparison
- How cost is charged: Line of credit = simple interest on what you use. MCA = fixed factor on the full amount, regardless of payoff speed.
- Early payoff: Line of credit rewards it (less interest). MCA usually doesn't — you owe the full payback either way.
- Cash-flow impact: Line of credit payments are periodic. MCA debits are often daily, which can choke a slow week.
- Reusability: A line of credit is revolving — pay down, draw again. An MCA is one-and-done; need more and you stack another.
When an MCA can still make sense
MCAs exist for a reason. If your credit or time-in-business won't clear a line of credit yet, an MCA can be a bridge — used deliberately, for a short window, with a real plan to refinance it into something cheaper. The danger is stacking: taking a second and third advance to cover the first, until daily debits swallow your cash flow.
That's exactly the situation we help owners climb out of — often by consolidating expensive advances into a single, far cheaper structure.
The bottom line
For most healthy businesses, a line of credit is the cheaper, more flexible tool — and it's worth checking whether you qualify before reaching for an advance. The application is short and the credit check is soft, so it won't ding your score to find out.