Determining the APR in a Merchant Cash Advance

At we represent small businesses struggling under the terms of an MCA agreement. Whether your business is facing a receivables shortfall or an unexpectedly high APR with your merchant cash advance, and cannot meet the repayment terms of your cash advance, you need the powerful representation we provide.

Our experienced debt relief specialists have a proven history of helping our clients reconcile their cash advances and will work closely with you to protect the business you’ve worked so hard to create. To learn more, contact our office today or complete the convenient intake form. 

What is a factor rate?

A merchant cash advance (MCA) is priced based on a factor rate, which is expressed as a decimal figure, unlike an interest rate or an APR (annual percentage rate) on a traditional loan that is a percentage. Factor rates are typically between 1.1 and 1.5 and depend on:

  • Type of industry
  • Length of time in business
  • Average monthly credit card sales
  • Credit rating
  • Advance amount

MCAs typically use factor rates rather than APRs, and fast repayment terms invariably lead to higher rates. Because repayment of the advance is based on a percentage of your future credit or debit card sales, the repayment amount can increase or decrease depending on your daily sales. 

Determining the actual cost of funding requires converting the factor rate into an annual percentage rate, however, which can actually result in an APR in the triple digits. In short, such a high cost of funding increases the risk of default on a merchant cash advance.

Factor Rate, Interest Rate, APR: What’s the difference in a merchant cash advance?

A factor rate is multiplied by your cash advance amount to show the total cost of funding, while an interest rate reflects the percentage of the principal charged on a traditional business loan. The APR reflects the total cost of a loan for one year, including the interest and additional fees, expressed as a percentage.

How To Calculate the Factor Rate for a Merchant Cash Advance

To determine how much you would pay for an MCA, multiply the amount of the advance by the factor rate. The total is the amount you will pay back to the funder. 

For instance, if you get a $10,000 MCA with a 1.3 factor rate the calculation would be: $10,000 x 1.3 = $13,00. This means you pay back $13,000 for borrowing $10,000, and the cost of the advance is $3,000 which is high compared to the cost of a traditional business loan.

How to Convert an MCA Factor Rate to an Interest Rate

In the example cited above, it’s easy to assume that the interest rate on a $10,000 advance with a 1.3-factor rate is 33 percent ($3000 cost of funds/$10,000 advance = 33%). But there are three steps involved in converting the factor rate to an interest rate:

  1. Multiply the number after the decimal point by 365: 0.3 x 365 = 109.5.
  2. Divide the result by the repayment term of the MCA. If the term is 90 days, the result will be 109.5 / 90 = 1.22.
  3. Convert the result into a percentage. 1.22 x 100 = 122 percent interest.  

As you can see, a 122 percent interest rate is far higher than the rate for traditional business loans. A merchant cash advance is a purchase and sale of future receivables, however, not a loan; the transaction is not governed by usury laws.

How to Convert an MCA Factor Rate to an APR

The annual percentage rate is the total repayment amount including interest and fees. For example, if the MCA provider charges a 2.5 percent origination fee and a $50 monthly admin fee, the total amount of your payment will be $13,400 ($13,000 financing payment + $250 origination fee + $150 for 3 monthly admin fees). 

This means the total cost of the advance is $3,400 which gives you a new factor rate: divide the total cost by the advance amount ($3,400 / $10,000 = 0.34) for a factor rate of 1.34. By plugging this higher factor rate into the interest calculation above, the result is an APR of 138 percent.

How to Avoid Defaulting on a Merchant Cash Advance

If you are at risk of defaulting on a high APR merchant cash advance, turn to the debt relief specialists at A well-conceived MCA agreement will include a reconciliation provision, which requires the funder to restructure the payments if you are facing a receivables shortfall, as long as you can show your business will return to profitability.

We have extensive experience advising all types of businesses and will work to help you reconcile your cash advance. Please contact our office today or complete the convenient intake form.