Overview

Merchant Cash Advance (MCA) factor rates tell you the total you must repay (advance × factor) but not the time value of money. Two MCAs with the same factor can have very different effective costs depending on how quickly you repay. To compare MCAs with loans, translate a factor rate into an APR-style number using a clear method and realistic repayment assumptions (daily holdback, average sales, or term in days).

Why the factor rate can be misleading

  • Factor rate definition: a multiplier (e.g., 1.3) applied to the advance to set total repayment. A $50,000 advance at 1.3 requires $65,000 total repayment.
  • It’s not an interest rate. It’s a total-payback figure that ignores repayment speed and cash-flow timing.
  • Regulators and consumer advocates (see Consumer Financial Protection Bureau) warn MCAs can result in very high effective costs for small businesses (Consumer Financial Protection Bureau).

Simple conversion methods (step-by-step)

1) Basic APR approximation (useful when you know an approximate term)

  • Calculate finance charge = Total repayment − Advance.
  • Estimate the average outstanding balance while repaying. For roughly even, linear paydown, average balance ≈ Advance / 2. (This is an approximation — MCAs repaid from sales are rarely linear.)
  • APR ≈ (Finance charge ÷ Average outstanding) × (365 ÷ days to repay).

Example: $50,000 advance, factor 1.3, repaid in 6 months (≈182 days)

  • Total repayment = $50,000 × 1.3 = $65,000
  • Finance charge = $15,000
  • Average outstanding ≈ $25,000
  • APR ≈ (15,000 ÷ 25,000) × (365 ÷ 182) ≈ 0.6 × 2.005 ≈ 120% APR

Notes: This method overstates or understates APR if the repayment pattern is front-loaded or back-loaded. Use it as a quick comparison, not a precise legal APR.

2) Holdback / sales-based method (best for card-volume MCAs)

  • If the lender takes a fixed percent of daily card sales (holdback), calculate daily repayment = holdback % × average daily card sales.
  • Days to repay = Total repayment ÷ daily repayment.
  • Then compute APR using the finance charge and average outstanding balance as above, where days to repay replaces term.

Example: same $50,000 advance, factor 1.3, holdback = 10% of card sales, average daily card sales = $1,000

  • Daily repayment = $100
  • Days to repay = $65,000 ÷ $100 = 650 days
  • Average outstanding ≈ $25,000 (still an approximation)
  • APR ≈ (15,000 ÷ 25,000) × (365 ÷ 650) ≈ 0.6 × 0.5615 ≈ 33.7% APR

This shows how repayment speed (driven by sales) drastically changes effective cost.

3) Precise method: IRR / cash-flow discounting (recommended when possible)

  • Build a cash-flow schedule: +Advance on day 0, negative daily repayments for each day until paid off.
  • Solve for the internal rate of return (IRR) on that series, then annualize (convert to APR).
  • Use a spreadsheet (Excel’s XIRR) or an online calculator. This captures irregular sales and variable repayments and is the most accurate.

Workflows retailers should follow before accepting an MCA

  1. Get the math in writing: advance, factor rate, estimated holdback %, sample daily repayment at current sales, and an assumed payoff timeline.
  2. Run at least two APR estimates: the basic approximation and an IRR-based model. Compare to a term loan or line of credit.
  3. Stress-test for lower sales: recalculate days-to-pay and APR assuming 10–30% lower average card volume.
  4. Explore alternatives: short-term loans, SBA microloans, or a business line of credit often carry lower effective APRs — see options like SBA microloans for small businesses.

Negotiation and practical tips

  • Ask for a daily repayment schedule or example amortization based on your sales pattern.
  • Negotiate the factor rate and the holdback percentage where possible; lower holdbacks lengthen term but reduce daily strain.
  • Compare offers using the same assumed sales scenario so comparisons are apples-to-apples.

Related resources on FinHelp.io

  • For a deeper breakdown of holdbacks and repayment mechanics, see “How Holdback Percentages Affect Merchant Cash Advance Repayment” (link).
  • If you want step-by-step APR conversion examples and calculator guidance, read “Short-Term Merchant Cash Advances: How Factor Rates Translate to APR” (link).
  • For cost comparisons versus traditional lending, see “Short-Term Loans: Responsible Use of Merchant Cash Advances — Costs, Covenants and Alternatives” (link).

Sources and regulation notes

Professional disclaimer

This article is educational and not individualized legal, tax, or lending advice. For decisions about financing, consult your accountant, attorney, or a trusted financial advisor and run your own cash-flow model before signing.

Author perspective

In my work advising retail clients, I routinely see factor rates that look reasonable until repayment speed is modeled — then the effective APR often exceeds 50–100% for short payoffs. Running a simple IRR or repayment-schedule check will reveal the real burden and help avoid costly refinancing cycles.