How Merchant Cash Advance Fees Work: 6 Numbers to Read Together

Factor rates get reported as a multiplier: 1.30 means a company buys $1.30 of future receivables for every $1 advanced. That is not the same as 1.30% interest, or even 30% APR. It’s easy to start at the cash advance fee and to stop there, but it makes more sense to read that fee in the context of five other numbers, because the fee in isolation does not tell you a thing about the annual cost or the suitability of the advance for your business.

Like a home mortgage, an MCA is six numbers, though you might not have seen them all laid out. There is the stated advance; the factor which says how much will be paid back; the “purchased amount” which is what is collected back; the cash you actually get; the payment frequency; and the annualized percentage cost.

Purchased Amount

The “Purchased Amount” comes from multiplying the advance times the factor, or 20,000 x 1.30 = 26,000. This is what you will pay back. On this $20,000 advance, which was factored at 1.30, $6,000 is the amount you pay above the cash advance. You can see the $6,000 is 30% of the advance. Sometimes $26,000 gets called the “cost,” and sometimes $6,000 is “the cost.” But how can both figures, which are different, be the same? When people call both “the cost,” that is imprecise. That makes it harder to compare deals.

The fourth figure, the cash that reaches you, is like the net proceeds after your closing costs on a mortgage or car loan. It’s the amount of cash you get from a transaction minus whatever didn’t reach your hands. Let’s say the up-front fees work out to $1000 on this $20,000 advance. So $20,000, minus $1000, leaves $19,000, which is the cash that hits your bank account today. The purchase amount was $26,000, and it does not matter if only $19,000 arrives, the entire purchase amount will still be collected. The gap just grew to $7,000 instead of $6,000.

When you renew an MCA, part of the new advance may go straight to the old lender. That is not cash you got. Some of that missing cash paid down a balance that you owe, and that old balance was not a fee. Part of the money might be cash in your bank account; part is someone else getting a payoff, and part is money going to fees. Ask for the funding statement and the payoff confirmation from the previous advance, and compare that to the new agreement. In New York, for example, a renewal disclosure statement must say whether some of the new cash will go toward unpaid finance charges or fees left behind from the prior advance.

The fifth number, your payment, is $144.44 ($26,000 divided by 180) only if you have 180 equal payments. On a real debit schedule, 180 entries likely take more than 180 days to complete. Holidays, skipped days and other adjustments can change the schedule. Add up the total amount you pay across all the MCAs you are paying, not just one debit. If your sales decline, then a reconciliation clause describes how to request an adjustment to your withdrawals. New York calls the percentage of sales used to set payments or true-ups the “split rate”. An estimated end date is not a promise that withdrawals will never continue beyond that date.

An MCA APR

The sixth number is the annualized percentage. One common method is to multiply the factor rate minus one times the number of days in the year and then divided by the term, like this: (1.30 - 1) x 365 / 180 = 60.83%. That shortcut does not account for the dozens of transactions going in and out of the account in a term. For an accurate APR on an MCA there is no one-size-fits-all answer. The true cost can be tricky to calculate for cash from merchant accounts, because they get paid back out of a stream of daily or weekly income. That’s different from term loans that collect one payment a month. All else equal, collecting the same dollars sooner raises the annual cost. A “six-month” estimate deserves a hard look if the payments would finish much sooner.

An MCA APR needs the amount financed, the finance charges that count toward the cost, and the size and timing of each and every payment. If projected sales figures have to be included, then they can influence the rate, meaning the APR might end up different from what was predicted, just based on how business fared at that time. In New York, an estimated APR for sales-based financing sits in a table, in its own row, beside the finance charge in dollars, total estimated payment, estimated payment, estimated term, and prepayment terms. California legislators said in their findings that giving the price of credit as a “factor rate” is misleading, especially when it’s different from the annual percentage cost.

Get a Written Payoff Figure

If you want to leave an MCA behind early, get a written payoff figure. Unlike a falling loan balance with an amortization schedule, the amount to collect back is preset at the start. If the agreement describes a price break or a prepayment penalty, that may determine the payoff amount. In New York, the disclosures must say whether you still owe all or part of the finance charge, and any extra fees, if you pay early. Standard costs and default charges on MCAs are two separate things. In case of a repayment failure, any recovery rights against your business, not to mention actions against you personally, all sit separate from the six numbers above.

Just calling something an MCA or an advance of future receipts also doesn’t settle what it is legally. Courts might look to see if the deal had more resemblance to a loan, weighing who keeps the risk of a slowdown. So it’s wrong to say MCAs are always beyond the reach of laws.

If you are looking to get a better handle on how much you’re paying to factor, start by reviewing the funding statement, the old payoff confirmation and the signed agreement. A factor-rate calculator can check the multiplication, but an APR calculator must take the net funding, fees, real payment dates and the right frequency. The math in a calculator may not be wrong, but your input can be. Compare its assumptions with the signed documents. No calculator can say for sure whether you signed a valid or enforceable deal.