Why this matters
MCAs are structured as a purchase of future receivables or as very short-term financing rather than a traditional installment loan. That structure makes headline numbers—like factor rates—hard to compare with bank loans. Regulators and consumer advocates warn MCAs can produce very high effective APRs depending on fees, repayment speed, and remittance frequency (see Consumer Financial Protection Bureau). For tax and reporting issues, treatment can vary; consult your tax advisor and IRS guidance (irs.gov).
Key terms you need to know
- Factor rate: a multiplier (for example 1.25 or 1.35). Multiply the advance by the factor to get the total repayment amount. Unlike an interest rate, it is not expressed as an annual percent.
- Holdback (or remittance percentage): the percent of daily card sales the lender collects until the advance is paid.
- Net proceeds: the cash you receive after fees are deducted.
- Effective APR: the annualized interest-equivalent rate that lets you compare MCAs to other financing.
How to calculate the true cost (step-by-step)
- Gather the numbers the lender gives you
- Gross advance offered (A_gross)
- Factor rate (F)
- Upfront fees or origination fees withheld (Fees)
- Expected repayment pattern (days to repay or holdback % and average daily sales)
- Compute net proceeds
- Net proceeds = A_gross – Fees
- Compute total repayment
- Total repayment = A_gross × F
- Compute finance charge
- Finance charge = Total repayment − Net proceeds
- Estimate days outstanding (T)
- If lender gives a term, use it (e.g., 180 or 365 days). If repayment is daily via a holdback, estimate days using: Days ≈ (Total repayment − beginning receivables) / average daily remittance. When in doubt, estimate using historical daily card volume multiplied by the holdback percentage.
- Annualize to get an approximate APR
- Simple annualized APR ≈ (Finance charge / Net proceeds) × (365 / T)
- For irregular daily remittances, use an internal rate of return (XIRR) over the actual payment schedule for a precise APR.
Worked example (realistic numbers)
- Gross advance (A_gross): $50,000
- Factor rate (F): 1.35 → Total repayment = $50,000 × 1.35 = $67,500
- Upfront origination fees: 4% ($2,000) → Net proceeds = $48,000
- Assume repayment completes in 180 days (T = 180)
Calculations:
- Finance charge = $67,500 − $48,000 = $19,500
- Simple annualized APR ≈ ($19,500 / $48,000) × (365 / 180) ≈ 0.40625 × 2.0278 ≈ 82.4%
Interpretation: the same factor rate can imply widely different APRs depending on how fast the money is repaid. If the same advance repays over 365 days, the APR falls to about 40.6%.
Why lenders quote factor rates instead of APR
Factor rates and the purchase-of-receivables structure make it easier for MCA providers to avoid standardized APR disclosure that applies to traditional term loans. That’s why comparing products by APR or using an effective-APR calculation is essential when you compare offers (see: “How Lenders Price Short-Term Business Loans: APR vs Factor Rate”).
Tools and accuracy tips
- Use XIRR or an APR calculator that accepts irregular daily or weekly payments to get a precise annualized rate. Spreadsheet functions (Excel XIRR or Google Sheets XIRR) work well when you can estimate the daily remittance stream.
- If the lender withholds fees from the advance, always use net proceeds in your APR calculation.
- Ask for a payment schedule or sample repayment history so you can run XIRR rather than relying on a simple term estimate.
Questions to ask the lender
- Are fees deducted from the disbursement or added to the repayment total?
- What is the holdback percentage and remittance frequency? (daily, weekly)
- Do you require a personal guarantee, bank or card processor lock, or ACH sweep?
- Can I see a sample amortization or recent repayment schedule for a client with similar sales?
Alternatives and when an MCA can make sense
MCAs can be useful for one-off short-term needs (e.g., urgent inventory for a seasonal spike) when traditional credit is unavailable. But they are expensive; consider lower-cost alternatives first: small-dollar term loans, lines of credit, SBA microloans, or invoice financing. See our guide on “Short-Term Merchant Funding: Alternatives to High-Cost Advances” for comparisons and decision rules.
Common mistakes business owners make
- Comparing factor rates without annualizing cost.
- Ignoring fees that reduce net proceeds.
- Underestimating the impact of faster repayment on APR (faster repayment = higher APR).
- Not checking for bank-account or processor holds and personal guarantees that increase risk.
Internal resources (further reading)
- Understanding factor rates and holdbacks: Understanding Factor Rates on Merchant Cash Advances
- How repayment timing affects cost: How Merchant Cash Advance Repayment Schedules Are Calculated
- Translating factor rates into borrower-facing cost comparisons: Translating Merchant Cash Advance Factor Rates into True Cost for Retailers
Authoritative sources
- Consumer Financial Protection Bureau (CFPB) — merchant cash advances and small-business financing basics: https://www.consumerfinance.gov/
- Internal Revenue Service — business expense and reporting guidance: https://www.irs.gov/
Professional disclaimer
This article is educational and not individualized tax, legal, or investment advice. Tax treatment and legal characterization of MCAs can vary; consult a qualified tax professional or attorney before signing. In my practice advising small businesses, I recommend running an XIRR analysis on any sample repayment schedule and comparing that APR to other financing offers before deciding.
Last reviewed: 2025
