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Merchant Cash Advance Factor Rate to APR: The Real Cost
A merchant cash advance with a 1.35 factor rate paid back over six months costs about 126% APR. Here is how to convert any factor rate and what to use instead.
A merchant cash advance with a 1.35 factor rate, paid back in daily payments over six months, costs about 126% APR. The factor rate looks like 35%, but you pay it back so fast that the true yearly cost is more than three times that. The faster the payback, the higher the real rate.
That's why a merchant cash advance (MCA) is the most expensive money most small businesses will ever use. It has a place in a true emergency. It should never be your plan.
How a factor rate works
You take the advance and multiply by the factor rate to get your total payback.
- Advance: $50,000
- Factor rate: 1.35
- Total payback: $67,500
- Cost: $17,500
The payback comes out of your bank account every business day, or as a cut of your card sales, until it is paid. Six months of business days is about 126 payments of $536.
Why the APR is so much higher than it looks
With a normal loan, interest is charged on what you still owe, and that balance shrinks as you pay. With an MCA, the cost is fixed up front. But you start paying it back the next day, so on average you only had about half the money for half a year. Paying $17,500 for that is the same as paying about 126% a year.
Factor rate to APR: a quick table
| Factor rate | Paid back over | Approximate APR |
|---|---|---|
| 1.20 | 6 months | 75% |
| 1.35 | 12 months | 63% |
| 1.35 | 6 months | 126% |
| 1.40 | 3 months | 283% |
These assume equal daily payments on business days. Your exact number depends on fees and the payment schedule.
Compare that to a term loan
The same $50,000 as a five-year bank term loan at 10% costs about $13,700 in interest, spread over 60 monthly payments of about $1,062. That's less total cost than the MCA, with a payment about one-tenth the size of a month of MCA payments.
What to use instead
- A business line of credit for short cash gaps. See line of credit vs. term loan.
- An SBA 7(a) loan to refinance expensive debt into longer, lower payments.
- A CDFI (community development financial institution) if a bank isn't a fit yet.
- Invoice financing if your cash is tied up in unpaid customer bills.
Run any offer through the MCA APR calculator to see its true cost, and read Chapter 6 for the full financing menu, including how to spot a bad deal.
Common questions
What is a factor rate?
A factor rate is how merchant cash advances price their money. You multiply the advance by the factor to get what you pay back. A $50,000 advance at a 1.35 factor means you repay $67,500. It is not an interest rate, and it is usually far more expensive than it looks.
How do you convert a factor rate to APR?
You need three things: the advance amount, the total payback, and how fast you pay it back. A 1.35 factor repaid in daily payments over six months works out to about 126% APR. The shorter the payback, the higher the APR.
Is 1.2 a good factor rate?
It is low for a merchant cash advance, but it is still expensive. A 1.20 factor repaid over six months is about 75% APR. A bank term loan or SBA loan usually costs a small fraction of that.
Can paying off a merchant cash advance early save money?
Often it does not. Many advances charge the full factor amount no matter when you pay. Ask in writing whether there is an early payoff discount before you sign.