Merchant cash advances (MCAs) are usually quoted with a factor rate, such as 1.2, 1.35 or 1.45, rather than an interest rate. The number looks small and simple, which is exactly the problem. A factor rate hides two things that drive the real cost of money: how long you have it and how quickly you pay it back.
This guide shows how to turn any factor rate into an APR. That gives you one yardstick for comparing an MCA with a bank loan, a line of credit or invoice factoring.
What a factor rate means
A factor rate sets the total you will repay: advance × factor rate = payback.
A $30,000 advance at a 1.3 factor rate means repaying $39,000, so the financing costs $9,000. The provider then collects that $39,000 with fixed daily or weekly debits from your bank account, or with a percentage of your daily card sales (the “holdback”).
The cost is fixed on the day you sign. Unlike interest, it doesn’t shrink if you pay early, unless your contract specifically offers a discount.
Why 1.3 is not 30% interest
It’s tempting to read a 1.3 factor rate as “30% interest”. Two differences make the real annual cost much higher.
- The term is short. You pay the full 30% over a few months, not a year. Paying 30% for six months is roughly like paying 60% for a year, before the second effect below.
- You start repaying immediately. Daily debits begin within days. On average you only hold about half the money over the term, yet you pay the fee on the whole amount. That roughly doubles the effective rate again.
The annual percentage rate (APR) accounts for both. It is the yearly rate at which your stream of payments exactly repays the cash you actually received. U.S. lenders use the same method to disclose APR on consumer loans under the Truth in Lending Act.
Factor rate to APR: a conversion table
These are approximate APRs for daily payments (about 21 business days a month) with no additional fees:
| Factor rate | Repaid in 3 months | 6 months | 9 months | 12 months |
|---|---|---|---|---|
| 1.15 | 113% | 57% | 38% | 29% |
| 1.25 | 183% | 92% | 62% | 46% |
| 1.35 | 250% | 126% | 84% | 63% |
| 1.45 | 314% | 158% | 106% | 79% |
Two patterns stand out.
- Shorter terms make the APR explode. The same 1.25 factor rate is 46% APR over a year and 183% over three months.
- Repaying faster costs more. With a holdback MCA, a strong sales month shortens the term, which raises your effective APR.
Don’t forget the fees
Many MCAs also deduct fees from the funding, such as origination, underwriting or administrative fees. Fees reduce the cash you actually receive, so they raise the APR further.
Take a $30,000 advance at 1.3, repaid over six months:
- With no fees: about 109% APR.
- With $900 of upfront fees: the business receives only $29,100 but still repays $39,000. The APR rises to about 123%, and each daily payment is about $310.
Ask for a written list of every fee, including ongoing ones such as ACH or “risk” fees.
How to convert any offer, step by step
- Payback amount: advance × factor rate.
- Cash received: advance minus all upfront fees.
- Number of payments: for fixed debits, the term in business days or weeks. For a holdback, estimate payback ÷ (average daily sales × holdback %).
- Payment size: payback ÷ number of payments.
- APR: solve for the rate that makes the present value of the payments equal the cash received, then annualize it (× 252 for daily business-day payments, × 52 for weekly).
Step 5 needs a financial calculator or a spreadsheet’s RATE function. Or use our merchant cash advance calculator, which does all five steps.
Comparing an MCA with other financing
Once everything is expressed as APR, you can compare fairly:
| Option | Typical cost | Speed | What approval is based on |
|---|---|---|---|
| Merchant cash advance | Often 40%–150%+ APR | 1–2 days | Card or bank deposits |
| Invoice factoring | Often 15%–70% APR on the cash advanced | 1–3 days | Your customers’ credit |
| Online term loan | Varies widely | Days | Revenue and credit |
| Business line of credit | Lower; interest only on what you use | Days to weeks | Credit and revenue |
| SBA 7(a) loan | Lowest, capped spreads over prime | Weeks to months | Credit, cash flow, collateral |
Our invoice factoring calculator converts factoring fees to an APR the same way.
Questions to ask before signing an MCA
- What is the total payback, and what is the estimated APR? California and New York, among other states, now require many commercial financing providers to disclose an estimated APR.
- Which fees are deducted upfront, and which are ongoing?
- Is there an early payoff discount? Get the exact terms in writing.
- If sales drop, can the payment be reconciled (adjusted to match actual receipts)?
- Does the contract require a personal guarantee, a lien on all business assets, or a confession of judgment?
- Are there anti-stacking clauses that bar other financing while the advance is outstanding?
When an MCA can still make sense
An MCA is rarely the cheapest money, but speed and flexible approval sometimes matter more. It can make sense when:
- a short-term, high-return opportunity clearly pays for itself, such as inventory you can sell quickly at a strong margin;
- no other financing is available in time.
The danger is using it to cover ongoing losses, or renewing and stacking advances to pay off earlier ones. If daily debits are straining your cash flow, a free advisor can help you look at alternatives. SCORE mentors and Small Business Development Centers are both SBA resource partners.
Sources:
- CFPB, Regulation Z §1026.22 (APR methodology)
- U.S. Small Business Administration, loan programs
- FTC business guidance for small businesses