Introduction

Merchant cash advances (MCAs) are short-term, revenue-based financing where repayment is typically tied to future sales. Unlike a bank loan with fixed monthly installments, MCA repayments commonly come from a percentage of daily credit‑ or debit-card transactions (a “holdback”) or by dividing a fixed payback amount derived from a factor rate. That structure makes daily payments flexible but can produce a much higher effective cost than traditional credit.

How lenders calculate total payback

  • Factor rate method: Lender multiplies the advance by a factor rate (example: 1.25–1.5). Total payback = advance × factor rate. A $50,000 advance at a 1.3 factor rate requires $65,000 total repayment.
  • Holdback (percentage of sales) method: Lender takes a set percentage of daily card sales (commonly 5%–20%) until the agreed total payback is met. Daily payment = daily card sales × holdback %.
  • Fixed‑time ACH or fixed daily/weekly amounts: Some MCA agreements convert the model into fixed withdrawals or blended schedules for operational reasons.

Example: Putting numbers together

1) Factor + holdback combo (common): Advance = $50,000; factor rate = 1.3 → total owed = $65,000. Holdback = 10% of card sales.

  • If average daily card sales = $1,000 → daily payment = $100 → estimated days to repay ≈ 650 days (65,000 ÷ 100).
  • If sales rise to $2,000/day → payment = $200/day → estimated days ≈ 325 days.

2) Pure fixed payback example: Some providers may require a fixed daily ACH calculated from an expected sales projection. If sales fall, the fixed pull can strain cash flow.

Why repayment timing varies

  • Sales volatility: Repayments slow when sales drop and accelerate when sales increase.
  • Seasonality: Retailers with seasonal peaks may repay faster during busy months but still face long tails during slow periods.
  • Reserve or split‑funding: Lenders sometimes hold reserves or divert a portion of daily processing to ensure minimum payments—this can create larger-than-expected shortfalls on slow days.

How to estimate the true cost (and implied APR)

MCAs don’t use an interest rate the way standard loans do, but you can estimate an implied APR to compare offers. A simple way is to:

  1. Calculate total dollars repaid (advance × factor rate).
  2. Estimate the average time to repay in years (days to repay ÷ 365).
  3. Use those numbers to compute an annualized percentage cost — this requires a basic APR formula or an online MCA-to-APR calculator.

Consumer advocates and the Consumer Financial Protection Bureau note that MCAs can produce very high annualized costs compared with term loans (see Consumer Financial Protection Bureau). For alternatives, the U.S. Small Business Administration outlines lower-cost options like microloans and term loans (see SBA.gov).

Key contract terms that affect the schedule

  • Factor rate: Directly sets total payback.
  • Holdback percentage: Sets how much of each day’s sales is diverted.
  • Minimum payment floors: Some agreements include a minimum daily/weekly pull.
  • Split funding / processing changes: Shifts a portion of receipts directly to the lender.
  • Personal guarantees and cross‑collateralization: Can increase lender remedies and costs if you default.

Practical tips before you sign

  • Ask for a sample repayment schedule showing best, expected, and worst-case sales scenarios.
  • Convert the offer into an estimated APR or use an independent calculator to compare costs with term loans or lines of credit.
  • Negotiate the holdback percentage and factor rate, and confirm whether there are hidden fees, origination charges, or prepayment costs.
  • Check whether the lender requires a personal guarantee or access to your merchant account or bank deposits.

Red flags to watch for

  • Vague contract language about total payback or how holds are calculated.
  • Unclear or excessive fees not disclosed up front.
  • Lender insists on too-high holdbacks that leave insufficient working capital.

Further reading and internal resources

Authoritative sources

  • Consumer Financial Protection Bureau — consumerfinance.gov (guidance and consumer alerts on merchant cash advances).
  • U.S. Small Business Administration — sba.gov (comparisons of small-business financing options).

Professional note and disclaimer

In my experience advising small businesses, MCAs can provide fast capital but often at a much higher effective cost than bank products. This article is educational and not individualized legal, tax, or financial advice. For decisions that affect your business long term, consult a licensed CPA or small‑business lending advisor.

FAQ (brief)

  • What if sales drop sharply? Payments typically fall with sales, but minimum payment clauses or split funding can still strain cash flow.
  • Can MCAs be refinanced? Yes, sometimes by rolling into a new advance or a term loan — compare total costs before refinancing.