Originally published November 11th, 2022
Last updated June 2nd, 2025
Merchant cash advances are a great way for modern eCommerce businesses to fund their growing company, however, they require a very fast payback schedule, and if a business is unprepared, they could find themselves potentially defaulting on their loan. This type of financing option can be helpful for small business owners who need a quick lump sum of working capital but comes with higher interest rates and shorter repayment terms than traditional loans.
When you decide to use revenue-based financing as the main way to fund your business, follow these tips to avoid defaulting on a merchant cash advance. Understanding your repayment schedule and cash flow management is essential to protect your business assets and avoid high-cost mca debt.
In All Things, Prioritize Your Lenders First
When you take on outside funding for your business, you should be 100% certain that you will be able to pay it back.
A good rule to stand by for yourself when taking on outside money is to prioritize your lenders. Your relationship with mca providers and other financial institutions can impact your eligibility for future business loans.
That means above all other expenses for your business, make sure that the people who lend you money are first priority when it comes to paying out. A missed mca repayment could trigger legal action or prevent you from qualifying for an sba loan.
The big reason for this is that if unexpected financial circumstances hit your business, and you are in good standing with your lender, you will always have access to emergency funds to handle those unexpected events. Maintaining your credit score and business bank account in good standing can open doors to more favorable financing options.
By contrast, if you decide to do something like default on a loan from a lender when you need emergency funds (or any funding in the future) your current lender will not provide you with the cash you need, and it’s possible other lenders won’t either.
So, to avoid a default, always make sure you don’t let it get as far as defaulting so you can still have options with lenders to help prevent anything bad from happening. Many lenders consider a business’s history of credit card sales and receivables before approving funding.
Map Out Your Expenses
Running your business, you will be accustomed to the kind of expenses you repeatedly encounter.
For most eCommerce businesses, the biggest recurring expenses are inventory purchasing, advertising, and paying other people (either as employees or for services).
If you take on a merchant cash advance, make sure you are aware of all future expenses coming up within the payback period of the loan so as to not get caught off guard by a sudden big expense. Effective cash flow planning is critical for borrowers with short-term repayment terms.
An unexpectedly large expense can put you at risk of defaulting on your merchant cash advance, so if you have your expenses mapped out, there’s no way to get surprised. Even one unexpected expense can disrupt mca repayment and damage your credit history.
Take Only the Exact Amount of Funding You Need
Every dollar you get loaned has an attached fee, and those fees come directly out of your bottom line. MCAs typically have a factor rate that determines how much you’ll repay beyond the lump sum borrowed.
For that reason, you should never take more than you need. Carefully reviewing your business operations will help you calculate your funding requirements more accurately.
By the same token, if you take too little funding, you will be short on big upcoming expenses, and that can potentially hurt future revenue that will be used toward paying back your loan. Choosing the right type of financing—whether an mca or term loan—should align with your business day cash needs.
In tandem with tip #1, use your mapped-out expenses to ascertain the exact amount of funding you need to minimize the risk of putting your future revenue at risk.
Keep Seasonality in Mind
Almost all products are affected by seasonality. Startup businesses must pay special attention to seasonal cash flow patterns when applying for business funding.
If you’ve been in business for a few years, you should know what your high months are, and what your low months are.
When you take funding, calculate how much more or less than usual you will need depending on the seasonality of your products, as getting it wrong in either direction can hurt your ability to repay a merchant cash advance that has a smaller payback window than a traditional loan. MCAs rely on predictable future sales, and a seasonal dip could disrupt your payment terms.
Manage Your Inventory Well and Prevent Stock-Outs
Inventory management is extremely tricky for eCommerce businesses. Business owners should consider inventory forecasting software to protect themselves against stockouts that threaten mca repayments.
If you sell on multiple channels, you’ll have to portion off parts of your inventory so they are inaccessible to each other, and poorly predicting how much inventory you need (either too much or too little) will either cause a glut of inventory hurting your margins or will cause a stockout.
Stockouts are devastating for eCommerce businesses and can be one of the reasons a seller will default on a loan. Lenders often review your business’s receivables and pricing to assess repayment ability.
To prevent this scenario, plan the management of your inventory well, use software if you need to, and put it all together to take the perfect amount of funding for your business to maximize profits.
Only Use Merchant Cash Advance Funding For a Few Expenses
If you’re deciding to take on revenue-based financing, make sure you use the money for a few select reasons, and not as a piggy bank for any expense your business may incur. Using your mca funding to cover too many line items can lead to poor cash flow decisions and increase the risk of default.
Typically, MCAs go toward inventory restocking as a primary function, and then you can have a few other reasons to take on them like new product creation, advertising, or paying yourself a consistent salary. When using a merchant cash advance, keep in mind that each debit card withdrawal or business bank account transfer counts toward your repayment plan.
It is smartest to pare down the number of uses for funding as possible, as it will generally keep the amount to borrow lower, so you can have an easier time paying it back, lowering the risk of default.
Take out a Term Loan to Stretch Out Payments
If you are expecting to not be able to pay a future merchant cash advance payment, then it might be a good idea to take on a more traditional style loan to pay off your MCA balance and give you the time you need to pay. Some business lines of credit or term loans have more flexible repayment terms that can offer relief from mca agreements.
You will take a hit in terms of fees and interest paid over time, but you will not ruin your ability to borrow money in the future and your business can continue to grow without having the extra stress of a defaulted loan to deal with. Avoiding default also protects your personal assets if a personal guarantee was involved in your mca application process.
See what your options are for getting a different source of funding to pay off your merchant cash advance. If the amount isn’t too large, you could even take out a personal loan to pay off your MCA balance and quickly pay that off.
Conclusion
With these tips, you can ensure you’ll never default on a merchant cash advance, and if you’re close to defaulting, provide some help to avoid this from occurring. Working with reputable mca providers and staying aware of your financial health can keep your business funding options open.
Cash management is one of those unfortunately boring, yet essential aspects of your business that can be the deciding factor between success and having to close your business. As a small business owner, staying ahead of your repayment schedule and cash flow challenges can help you avoid the pitfalls of high-cost short-term funding.
