How factor rates actually work
Merchant cash advance companies don't charge interest — at least not the way banks do. Instead, they use a factor rate: a multiplier applied to your advance that determines the total you repay. It's deliberately simpler than an interest rate, and deliberately harder to compare to one.
The math is straightforward. An advance of $50,000 at a 1.35 factor rate means you owe $67,500 back, regardless of how quickly you pay it off. That $17,500 is the cost of capital. Divided over a 9-month payback period, you're paying roughly $250 per business day until the balance is satisfied.
Why the structure matters
Two things make factor rates fundamentally different from interest rates:
- The total cost is fixed at signing. Unlike a conventional loan, paying off an MCA early doesn't save you money in most contracts. The $17,500 is owed whether you pay it off in 90 days or 18 months.
- Payments amortize through daily or weekly deductions. Most MCAs draw directly from your merchant processing account (a "holdback" of 10–20% of daily sales), or from your business bank account via ACH. This means you lose access to working capital every single business day, not just once a month.
Why APR is the only honest comparison
APR — annual percentage rate — is the standard financial metric for comparing the cost of capital across different products. It accounts for both the total cost and the timing of payments. A $10,000 bill paid in one year is a very different thing from a $10,000 bill paid in three months, even if the dollar amount is the same.
When you translate factor rates into APRs, the numbers get uncomfortable fast. A 1.35 factor over 9 months works out to roughly 85% APR. A 1.45 factor over 6 months is closer to 160%. Compare that to a typical SBA 7(a) loan at 10-13% APR or a business line of credit at 8-25% APR, and the difference isn't incremental — it's an order of magnitude.
It's not just the factor rate — it's the daily payment schedule. You receive the advance once, but you start paying it back the next business day, and keep paying every day until the balance clears. You never have full use of the capital. A $50K advance paid back at $250/day means you only have access to the full $50K for one day.
When an MCA actually makes sense
We're not going to tell you MCAs are always wrong. They exist because they fill a real gap in the market. Here are the three scenarios where an MCA is genuinely the right tool:
1. You need capital in 24-72 hours
If a genuine time-sensitive opportunity requires capital faster than any term loan can close, and the opportunity's return substantially exceeds the MCA's cost, the math can work. A restaurant securing a once-in-a-decade equipment deal from a closing competitor. A trucking company that needs to take on a contract starting Monday. A retailer buying inventory at wholesale that they'll flip within 60 days.
2. Your credit profile disqualifies you from conventional loans
If your personal FICO is below 600, your business is under a year old, or you have a recent bankruptcy, most conventional lenders will pass. An MCA may be your only option for capital access. In that case, the comparison isn't MCA vs. term loan — it's MCA vs. no capital at all. That's a legitimate calculation to make.
3. Short-term bridging where total dollar cost is modest
On a $20,000 advance paid back in 4 months, the absolute dollar cost might be $5,000 — unpleasant, but manageable if the capital unlocks real revenue. The bigger risk is on larger and longer advances, where the same APR compounds into six-figure cost differentials.
Red flags in MCA contracts
If you decide an MCA is the right tool for your situation, read the contract carefully. Here are the provisions that do the most damage:
- Confession of judgment (COJ)A provision that lets the funder obtain a judgment against you without a court hearing if you miss payments. Banned in New York and several other states. Refuse any contract containing one.
- Personal guarantees coupled with "true up" provisionsNormal personal guarantees are standard. "True up" provisions let the funder demand full payback immediately if daily revenue falls below a threshold — turning flexible daily payments into an instant lump-sum demand.
- No prepayment discountMany MCA contracts explicitly state that early payoff does not reduce the payback amount. Some offer token discounts. Negotiate this before signing — a clean prepayment discount can save you thousands if you have the liquidity later.
- Stacking restrictions without clear termsMost MCAs prohibit taking a second MCA while the first is outstanding. Fair. But some contracts' "stacking" language is broad enough to cover any other business credit — lines of credit, equipment loans — putting you in default for taking a better product later.
- "Reconciliation" clauses that exist only in theoryLegitimate MCAs include true-up provisions allowing daily payments to shrink if revenue drops. Some contracts technically include this language but make it impractical to invoke, requiring notarized documentation within narrow windows.
Alternatives to consider first
Before you sign an MCA, make sure you've actually been denied the alternatives. Our funding specialists frequently see business owners who were approved for MCAs but never properly applied for better products. Order of priority:
- SBA loans — if you have time (60-90 days) and a 640+ FICO, this is the lowest-cost capital available.
- Business line of credit — revolving access, 8-25% APR, typically 3-7 days to close. Perfect for working capital and cash flow smoothing.
- Equipment financing — if any portion of the need is for equipment, separating that out gets you a rate in the single digits to low teens vs. MCA territory.
- Invoice factoring — if you're B2B with unpaid invoices, this turns receivables into immediate cash at a fraction of MCA cost.
- Short-term bank loan — even a 6-month bank loan at 15% APR is cheaper than nearly any MCA.
An honest broker's job is to tell you which of these you qualify for — and only suggest an MCA if you don't qualify for anything else, or if speed genuinely requires it. Start a pre-qualification to see what you actually qualify for before committing to an MCA.