MCA vs Overdraft: Which is Better?
One is cheap but small and hard to get; the other is fast and generous but expensive. Here is the honest arithmetic behind choosing between them.
Quick Answer
Use an overdraft if the bank will give you one big enough: it is the cheaper product and you only pay for what you draw. Use a merchant cash advance when you need more than the bank will extend, the bank has said no, or you need the money within days rather than weeks.
Cost, flexibility (draw and repay freely), and interest only on the drawn balance.
Amount available, speed (decision in 24 hours), and approval based on card takings rather than a bank credit decision.
Two very different products
A business overdraft is a revolving facility attached to your bank account: the bank agrees a limit, you dip into it when cash is short, and you pay interest - typically somewhere in the 8-15% APR range - only on the balance you actually use. Clear the balance and the cost stops.
A merchant cash advance is a lump sum repaid automatically through a percentage of your daily card sales. It is not legally a loan at all - it is a purchase of your future card takings - which is why approval is fast (typically 24-48 hours), why around 90% of applicants are approved, and why your credit history matters less than your till receipts. The price is a factor rate, typically 1.1 to 1.4: borrow £10,000 at 1.3 and you repay £13,000, full stop.
Side-by-side comparison
| Business overdraft | Merchant cash advance | |
|---|---|---|
| Typical cost | 8-15% APR on the drawn balance | Factor rate 1.1-1.4x (fixed fee of £1,000-£4,000 per £10,000) |
| Typical amounts | Usually capped in the low tens of thousands for SMEs | £1,000 to £1,000,000, typically 1-2x monthly card sales |
| Speed | Same day for existing customers; slower for new limits | Decision in 24 hours, funds 1-2 days after approval |
| Approval based on | Bank credit decision, account history | Card takings; bad credit usually means a higher rate, not a decline |
| Repayment | Flexible - repay whenever cash allows | Fixed % of daily card sales (commonly 5-20%) until repaid |
| Early repayment | Saves interest | Saves nothing - the fee is fixed on day one |
| Regulation | Part of the regulated banking relationship | Generally unregulated business lending |
| Can be withdrawn? | Yes - banks can reduce or remove facilities | No - once advanced, the cash is yours |
The worked example: £20,000 for a cash-flow gap
Suppose you need £20,000 to bridge a slow quarter.
- Overdraft at 12% APR, fully drawn for 12 months: £20,000 × 12% = £2,400 in interest. Draw it for only six months and the cost roughly halves to about £1,200, because interest accrues only while the balance is outstanding.
- MCA at a 1.2x factor rate: £20,000 × 1.2 = £24,000 to repay - a fixed £4,000 cost whether repayment takes four months or fourteen.
- MCA at a 1.3x factor rate (a typical quote for a weaker file): £20,000 × 1.3 = £26,000 - a £6,000 cost, two and a half times the fully-drawn overdraft.
On pure price the overdraft wins comfortably. The comparison only gets interesting because of what the price ignores: most businesses asking this question cannot actually get a £20,000 overdraft, or already have one and have used it. Try the funding calculator with your own numbers.
When the overdraft is the right answer
- The gap is short and modest - one to three months, within the limit your bank will agree.
- You value paying only for what you use - if the gap might not materialise, an unused overdraft costs little or nothing.
- Your banking relationship is healthy - a bank that knows your account well can approve an extension the same day.
When the MCA is the right answer
- You need more than the bank will extend. Overdraft limits rarely stretch to the £50,000+ a stock purchase or refit can require; MCAs are sized on your card takings instead.
- The bank has declined an increase. MCA approval runs on sales data, and around 90% of applicants are approved.
- You want repayments that flex with trade. The daily percentage takes more on busy days and less on quiet ones, rather than a hard limit hanging over the account.
- The spend has a short-term payback - seasonal stock, an urgent repair, an opportunity with a deadline. Expensive short-term money needs a short-term return to justify itself.
And one situation where the MCA is the wrong answer regardless: covering losses or repaying other borrowing. If your margins are thinner than the daily holdback percentage on offer, the advance consumes more than you earn - read when NOT to take a merchant cash advance before signing anything.
The verdict
The overdraft is the better product; the MCA is the more available one. If your bank will give you the limit you need, take it - at 8-15% APR on only the drawn balance, nothing in the fast-funding market competes on cost. When the bank says no, says not enough, or says not this week, a merchant cash advance is the realistic alternative: dearer per pound (£4,000 versus £2,400 on our £20,000 example, and more at higher factor rates), but sized to your sales and in your account within days. Compare both against the wider market on our business funding page, and see the factor rates guide for more cost arithmetic.
Frequently asked questions
Is an overdraft cheaper than a merchant cash advance?
Usually, yes. An overdraft at 12% APR on £20,000 fully drawn for a year costs about £2,400 in interest, and you only pay interest on what you actually use. An MCA on the same £20,000 at a 1.2x factor rate costs a fixed £4,000 regardless of how quickly you repay.
Why would anyone choose an MCA over an overdraft?
Because overdrafts are hard to get and small. Banks cap most SME overdrafts in the low tens of thousands and can decline an increase or withdraw the facility. An MCA is approved on your card takings rather than a bank credit decision, offers larger sums, and pays out within days.
Is a merchant cash advance regulated like an overdraft?
Generally no. MCAs to limited companies are unregulated business lending, so you do not get the protections that apply to regulated credit. A business overdraft from your bank sits inside the regulated banking relationship, though business lending protections are still more limited than consumer ones.
Does repaying an MCA early save money?
No - the fee is fixed on day one. Borrow £20,000 at 1.2x and you owe £24,000 whether you repay in four months or fourteen. Repaying quickly actually raises the effective annual cost. With an overdraft, clearing the balance early genuinely reduces interest.
Can I have both an overdraft and an MCA?
Technically yes, but be careful. If you are using an MCA to cover an overdraft you cannot clear, or stacking one advance on another, that is a warning sign - each product adds fixed cost, and two repayment obligations compound the squeeze. Speak to your accountant before adding a second facility.
Bank said no, or not enough?
Tell us your numbers and we will show you what MCA providers would actually offer - and tell you honestly if sticking with the overdraft is the better deal.
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