Guide · Merchant cash advance
Factor rate, APR, and what an offer really costs.
A merchant cash advance (MCA) is usually priced with a factor rate, such as 1.30, instead of an interest rate. The two are not the same number, and comparing them directly is the most common mistake owners make when reading an offer.
What a factor rate does
A factor rate is a multiplier applied once to the amount advanced. The result is the total you agree to repay. It does not change if you repay sooner or later unless the contract says otherwise.
Here is an illustration with round numbers. It is not an offer or a quote.
- Advance: $50,000
- Factor rate: 1.30
- Total to repay: $50,000 × 1.30 = $65,000
- Cost of the advance: $65,000 − $50,000 = $15,000
Why that is not "30%"
The $15,000 cost is 30% of the advance, but an annual percentage rate (APR) measures cost per year on the balance outstanding. Because MCA repayments typically come out of your daily or weekly receipts, the balance shrinks quickly. The same $15,000 charged over a few months is a much higher annualized rate than the same $15,000 charged over a year. So two offers with the same factor rate can have very different APRs if their repayment speeds differ.
Five numbers to get in writing
- The amount you actually receive. Ask whether origination or other fees are taken out of the advance first.
- The total amount to repay, in dollars.
- The payment: a fixed daily or weekly amount, or a percentage of receipts.
- The expected repayment time and what happens if sales are slower or faster.
- Whether the cost is stated as an estimated APR, and which assumptions sit behind it.
The rules depend on your state
New York's Commercial Finance Disclosure Law, implemented through the Department of Financial Services' Part 600 regulation, requires providers to show certain commercial financing terms, including an estimated APR for sales-based financing when a specific offer is quoted. Other states have their own disclosure laws, and many have none. If your business is in a state without one, it is more important to do the arithmetic yourself.
Compare on the same footing
Put every offer on one page: dollars received, total repayment, payment size, and how many weeks it should take. Divide the cost by the dollars received to compare offers on a plain basis, then ask each provider for an APR estimate. If a provider will not explain its numbers, treat that as information.
Read before you sign
- Whether a personal guarantee is required.
- Whether the contract lets the provider adjust daily payments, and how you can ask for a reconciliation if sales drop.
- What happens on default, including any confession-of-judgment or similar clause. Have a lawyer review it.
- Whether existing advances on your account would be affected.
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