Merchant Cash Advances and Factor Rates: The Real Cost in APR

Merchant cash advances are fast, require little paperwork and approve businesses banks turn down. They're also routinely the most expensive money a small business ever takes. The problem is that the price is quoted in a way that's easy to misread.

How an MCA works

A provider gives you a lump sum, the advance. In return you agree to deliver a fixed payback amount from future sales, collected as a daily or weekly debit from your bank account or a percentage of card sales. The payback is set by the factor rate:

A $50,000 advance at a factor rate of 1.30 means a $65,000 payback. The finance charge is $15,000, plus any fees.

Why 1.30 isn't 30%

An interest rate is a price per year. A factor rate is a price per deal, regardless of time. If you repay that $65,000 over six months instead of a year, you pay the same $15,000 but had the money for half as long, and you were paying it back every business day from the start. Here's the same advance collected at different speeds, assuming equal payments every business day (about 252 a year) and no fees:

Add a $1,000 fee taken from the advance on the 126-day version and the estimate rises to about 118%, because you received $49,000 but still repay $65,000.

These are estimates. With a split-of-sales MCA, the term depends on your sales: a strong month shortens it and raises the APR; a slow month stretches it and lowers the APR.

How the conversion works

APR is the yearly rate at which the payments you make are worth exactly the money you received. For equal payments:

where n is the number of payments and r the rate per payment period, found by trial (our calculator solves it numerically). That's the same idea behind APR disclosures on consumer loans. Try it with your own offer in the APR calculator.

State disclosure laws

There's no federal truth-in-lending law for business financing, but several states have stepped in. California's commercial financing disclosure law took effect in December 2022 and New York's had a compliance date of August 1, 2023, with Utah and Virginia among the other early states. New York's law covers MCA and factoring companies for deals of $2.5 million or less and requires an estimated APR. If your business is in one of these states, ask for the disclosure before you sign; if you're elsewhere, ask anyway.

Contract terms to read twice

• Reconciliation. If your sales fall, can you ask for lower payments? How, and how fast do they respond?
• Confession of judgment. Some contracts include one, letting the provider get a judgment without a lawsuit. New York restricted their use against out-of-state businesses in 2019.
• Personal or performance guarantee. What exactly makes you personally liable?
• Default triggers. Changing bank accounts, blocking debits, taking other financing.
• Fees. Origination, underwriting, ACH, "administrative" fees and whether they come out of the advance.
• Early payoff. Is there a discount, or is the full payback owed regardless?

When owners use them, and alternatives first

The Fed's 2025 Small Business Credit Survey found 38% of employer firms applied for a loan, line of credit or merchant cash advance in the prior year, and meeting operating expenses was the top reason firms sought financing. Before an MCA, compare a bank or credit union line of credit, an SBA Express or microloan, a business credit card for very short needs, invoice factoring if you sell to other businesses, or negotiating longer terms with suppliers. If an MCA is truly the only option, take the smallest amount that solves the problem and have a plan to never need a second one.