Are Merchant Loans Suitable For Long-Term Financing?

When David’s restaurant needed a $120,000 commercial kitchen build-out, he knew this wasn’t a quick fix. The renovation would take four months, increase revenue over years, and be a fundamental upgrade to his business’s long-term capabilities and capacity.

His MCA broker was quick to offer $120,000 in financing. The factor rate of 1.38 and estimated 12-month term meant David would repay $165,600—$45,600 just for the privilege of borrowing. That's 38% for one year - approaching an effective APR of almost 45%

David stopped. Something didn’t add up. This capital would last a decade in his business. Should he fund it with a method costing $45,600 over twelve months?

He then called his accountant, who asked one simple question: “Are you using short-term financing for a long-term investment?” That question changed everything.

The Short-Term Tool Trap

Here's the blunt truth: merchant cash advances were never designed for long-term financing. They were created to solve short-term problems: bridging cash flow gaps, seizing time-sensitive opportunities, managing emergencies, funding seasonal inventory.

The clue is in the average repayment period: 3–12 months. Even “long” MCAs seldom stretch beyond eighteen months. Compare that to conventional term loans of 3–10 years, equipment financing of 5–7 years, or SBA loans at 25 years for real estate.

This short duration creates the first problem: high effective interest rates packed into brief periods. A 1.35 factor rate over six months equates to roughly 70% APR. The same 1.35 factor spread over ten years would be about 4% APR, quite reasonable. But MCAs don’t work that way. The factor rate sets total cost regardless of time, so the shorter the repayment, the more crushing the annual rate.

The Math That Doesn’t Add Up

Return now to David’s kitchen renovation. The $120,000 investment would add value for ten years. A proper equipment loan at 9% APR over seven years would total about $37,800 in interest, expensive, but proportional to the value received.

The MCA arrangement offered: $45,600 paid over only twelve months. If David can’t repay the advance in twelve months and has to renew (a common occurrence with large MCAs), he’d face another factor rate on new financing and might pay $80,000–$100,000 over two years for equipment that a traditional loan would have financed for about $37,800.

In short, using short-term high-cost financing for long-term investments multiplies costs. It's like using a credit card cash advance to buy a house-possible but financially devastating.

When Renewal becomes a trap

“But I’ll just renew under better terms,” David might think. This is where long-term MCA use becomes genuinely hazardous.

What actually occurs: David receives the $120,000 MCA in January. Through December, he has paid approximately $140,000 toward the $165,600 obligation. The business still owes $25,600, but its cash flow has been squeezed for a year by the daily payments averaging $11,600 monthly.

The MCA provider makes a renewal offer: “Take $80,000 new capital, roll in the remaining $25,600, and restart.” David now owes $143,800 on the new advance (factor rate 1.37). He received $80,000 fresh capital but committed to another year of crushing payments.

After two years in this cycle, David has drawn $200,000 total-$120,000 initially and an $80,000 renewal-and paid approximately $240,000-represented a loss of $40,000 just to service the financing before accounting for any value created within the business.

This is how short-term financing becomes a long-term debt trap. Each renewal may look sensible in isolation, but together they have imposed unsustainable burdens that permanent financing would have avoided.

The Opportunity Cost Crisis

Beyond direct costs, the use of MCAs for long-term needs incurs severe opportunity costs.

David's $11,600 average monthly MCA payment for twelve months translates into $139,200 leaving his business. That capital can't be used for:

• Marketing campaigns aimed at acquiring new customers
• Hiring more staff and enhancing service
• R&D for menu innovations
• Equipment upgrades beyond the original renovation
• Cash reserves for stability

A $2,200 a month traditional equipment loan would have left David with $9,400 a month of capital, or $112,800 a year, which the MCA structure absorbed. Over a decade, that opportunity cost compounds into more than $1 million in lost strategic flexibility.

The "savings" by avoiding the traditional financing approval process costs far more in lost opportunities than was saved in time.

The Cash Flow Strangulation

Another more subtle problem of long-term MCA use is the creation of permanent cash flow constraints that stunt growth and trap you in continuous MCA dependence.

Imagine a restaurant generating $180,000 a month with 8% net margins, which is a $14,400 monthly profit. An ongoing MCA that requires $12,000 a month in payments reduces available cash to $2,400 a month, barely enough for minor repairs or small opportunities.

Where does replacement capital come from when equipment breaks? Another MCA, because reserves never accumulate. When a marketing opportunity arises, how do you fund it? Another MCA. When you want to open a second location, where does the capital come from? Another MCA, if you can even qualify while still servicing existing advances.

You become dependent on expensive financing-not because it serves you well, but because you have never built reserves to free yourself from it.

When MCAs Are Never Appropriate Long-Term?

Some uses should never involve MCAs, irrespective of access:

Real Estate Purchases: Buildings with decades of value shouldn't be financed at 50-100% APR. Period.

Major Equipment with 10+ Year Lifespans: Commercial ovens, HVAC systems, vehicles, anything lasting a decade needs decade-appropriate financing.

Business Expansion: New locations call for permanent capital structures, not short-term bridges.

Debt Consolidation: Replacing old debt with new, expensive debt rarely works in the long run. It only delays the inevitable.

Operating Losses: If you need ongoing financing to cover losses, your business model has fundamental problems MCAs can't fix.

The Rare Exception

Is there any scenario where MCAs make sense for longer-term needs? Barely.

It works when you use an initial MCA to build a track record that qualifies you for proper long-term financing: take a $30,000 MCA, use it productively, successfully repay over six months, then leverage that success to qualify for a $150,000 SBA loan for real long-term needs.

You'd be paying a premium on that first $30,000 but as a means to bridge to affordable long-term capital, it would be well worth it. The important thing is to have a specific plan in place to graduate from MCAs onto proper financing in 12–18 months.

What David Actually Did

David walked away from the $120,000 MCA. Instead he:

• Applied for an SBA 7(a) loan (90 days to approval)
• Took a temporary $30,000 MCA to cover immediate needs during the SBA process.
• Secured SBA approval for $120,000 at 8.5% APR over 10 years
• Utilized SBA funds to conclude renovations and pay off the small MCA 
• Monthly payment: $1,480 for 10 years vs. $11,600 for 12 months 

Total cost over ten years: $57,600 in SBA interest plus $9,000 in MCA fees = $66,600 total If he'd relied solely on MCAs and renewals, it would have been $180,000+ over that period. By using MCAs only as temporary bridges and choosing a longer timeline, he saved roughly $113,400. 

The Bottom Line 

Merchant cash advances are powerful short-term tools for short-term needs: 3–12 month bridges, seasonal financing, emergency capital, and time-sensitive opportunities. They are terrible long-term financing mechanisms. 

Their costs, payment structures, and renewal cycles spiral into debt that destroys businesses when applied to long-term investments. The right question isn't "Can I use MCAs long-term?" but "Why am I considering short-term financing for long-term needs, and what permanent financing should I pursue instead?" Sometimes the answers are patience, planning, and delayed gratification that save your business from paying three times what things should cost. Short-term tools for short-term needs. 

Long-term tools for long-term needs. Mixing them up costs more than many business owners realize until they're trapped in renewal cycles, wondering how $50,000 in borrowing became $150,000 in payments.