The truth about ecommerce loans

Finaloop Team
March 12, 2023
Understand how popular ecommerce financing loans actually work to avoid paying exorbitant fees

Getting an ecommerce loan can be an extremely attractive financing option to get your business going. 

Financing options like Merchant Cash Advances (MCA) are popular with ecommerce brands. But many have no clue how they actually work. Crazily, some brands even end up paying fees equivalent to 299% APR!

Here’s the truth about these kinds of ecommerce "loans":


The basics of ecommerce financing

First thing first… the basics.

There are 5 common types of ecomm financing: 

  • Traditional 
  • Line of credit
  • Rev-based / Merchant cash advance (MCA)
  • Instant advance 
  • SBA loan 

The difference is Rev-based and MCAs are not *legally* considered loans.

That means there are no regulated fees and they don't have to disclose an APR percentage—the most common way businesses judge which financing options will work best for them. This makes the ecomm financing landscape a minefield, unless you have deep financial knowledge and are savvy.


Understanding your MCA

Now to be clear, MCAs are not automatically a red-flag. There are situations where they may make sense for a business. But only if you understand how they work.

So how do they work? 

With Rev-based financing & MCAs, you pay based on a fixed percentage of your future sales or payouts (in the case of Shopify Capital). That may sound appealing if you need fast cash, but it can end up coming with a high financing cost.

Remember the brand we mentioned that was effectively paying a 299% APR? 

They took out an MCA because they thought it was a good idea, as they didn't have an intuitive way to compare it to alternative forms of financing.

And truthfully, there isn't an exact science for this. MCAs and Rev-based financing base fees on revenue projections while  fees from traditional forms of financing are based on a percentage of the principal. One of the best ways to compare the two is to convert the MCA fee structure into an APR percentage.

Again, Rev-based financing & MCAs are not inherently bad. There are situations where they're the best option. But you need to compare apples-to-apples first so you avoid paying an exorbitant fee.

Use Finaloop’s free ecommerce loan calculator to easily calculate your APR.

About Finaloop

We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper, your accounting software, and your ecomm integrations. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.

*The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.*

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