Quick overview

Short-term merchant cash advances (MCAs) provide fast funding by purchasing a slice of a business’s future card receivables. They’re popular for time-sensitive needs—inventory, payroll, or emergency fixes—but their pricing structure (factor rates, holdbacks, and daily/weekly remittances) makes straightforward APR comparisons unreliable.

How MCAs actually work

  • Lender advances a lump sum based on expected card sales.
  • Repayment occurs as a percentage of daily or weekly card receipts (a “holdback”) or by fixed daily/weekly withdrawals.
  • Pricing is usually quoted as a factor rate (for example, 1.2 means you repay 1.2 × the advance) rather than an interest rate.

For a deeper look at factor rates, see our guide on understanding factor rates on merchant cash advances.

Why APR is misleading for MCAs

APR assumes interest calculated over a standard amortization schedule with monthly payments. MCAs are repaid with variable, often daily, payments tied to sales. That changes the timing of cash flows and increases the effective cost for several reasons:

  • Early repayments: Daily remittances return principal faster than monthly schedules, increasing the effective annualized rate.
  • Fixed factor vs. interest percent: A factor rate doesn’t translate cleanly into APR—two offers with the same factor rate can have very different effective APRs depending on repayment speed.
  • No standard term: Some MCAs settle faster as sales improve; shorter effective terms boost the annualized cost.

Regulators and consumer advocates warn borrowers to compare total payback, not just APR-like numbers (Consumer Financial Protection Bureau).

How to approximate the true annualized cost (simple method)

  1. Compute total repayment = advance × factor rate.
  2. Calculate simple annualized APR ≈ ((total repayment / advance − 1) × (12 / months to repay)) × 100.

Example (approximate):

  • Advance: $50,000
  • Factor rate: 1.25 → total repayment $62,500
  • If repaid in 6 months → simple annualized APR ≈ ((62,500/50,000 − 1) × (12/6)) × 100 = (0.25 × 2) × 100 = 50% APR (approx.).

Important caveat: This method gives a rough annualized figure. Because payments are made daily/weekly (and reduce outstanding balance earlier), the real effective APR is often higher than this simple calculation. For a more exact conversion, model daily cash flows and solve the internal rate of return (IRR) or use an APR conversion calculator. See our step-by-step how to calculate true cost of a merchant cash advance.

Practical examples and red flags

  • Short-term MCAs (30–120 days) with factor rates of 1.2–1.5 can produce effective APRs well above 50% when annualized.
  • Red flags in offers: vague term length, no written holdback percentage, large origination or processing fees added to the factor rate.

Before signing, read our checklist: what to ask before signing a merchant cash advance agreement.

Who should consider an MCA—and when to avoid one

Consider an MCA when:

  • You need immediate funds and traditional lenders aren’t an option.
  • You have stable, predictable card sales that can support daily/weekly remittances.

Avoid an MCA when:

  • Your sales are volatile or seasonal without a clear recovery plan.
  • You can qualify for a lower-cost option (SBA microloan, business line of credit, invoice financing).

Professional tips

  • Always calculate total payback and run an annualized estimate using the simple method above.
  • Model cash flow: simulate daily/weekly repayments to see the strain on operations.
  • Compare alternatives: lines of credit, installment business loans, invoice factoring, or SBA programs often cost less.
  • Negotiate: ask for lower factor rates, clear disclosure of holdbacks, and removal of hidden fees.

Short FAQs

  • Are MCAs loans?
    Not technically—most MCA contracts are purchasereceivable agreements, not loan agreements. However, courts and regulators sometimes treat them like credit depending on state law. (Consumer Financial Protection Bureau)

  • What happens if sales drop?
    Daily or weekly payments typically decline with sales, but low sales can stretch your cash flow and trigger default remedies in the MCA contract.

Final takeaways

APR can help compare traditional loans but often misstates an MCA’s real cost. Treat factor rates and total repayment as primary metrics, model actual remittance timing, and compare alternatives before committing.

This article is educational and not personalized financial advice. For tailored guidance, consult a licensed financial advisor or your small-business counselor. Primary sources and regulatory guidance include the Consumer Financial Protection Bureau (https://www.consumerfinance.gov/) and finance explainers from trusted outlets like Investopedia and NerdWallet.

Sources

  • Consumer Financial Protection Bureau — merchant cash advance resources (consumerfinance.gov).
  • Investopedia — merchant cash advance overview.
  • NerdWallet — small-business financing guides.