The True APR of a Merchant Cash Advance: How to Do the Math
Factor rates look deceptively simple. Convert yours to an APR and you'll see why most MCAs cost 60–300% annually — and when the SBA is a better option.
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A factor rate of 1.35 sounds innocuous. You borrow $50,000, you repay $67,500 — a $17,500 cost. What merchant cash advance providers don't highlight: that $17,500 cost, spread over 5 months of daily holdbacks, works out to an effective APR above 100%.
The math is not complicated, but the way MCAs are marketed obscures it.
How to Convert Factor Rate to APR
The formula: APR = (total cost / advance) × (365 / repayment days)
With a $50,000 advance, factor rate 1.35, and 150 days to pay off:
- Total repayment: $50,000 × 1.35 = $67,500
- Total cost: $17,500
- APR: ($17,500 / $50,000) × (365 / 150) = 0.35 × 2.43 = 85%
That's 85% annual interest. At 120 days to pay off, it's over 100%. At 90 days, it approaches 150%.
Why the Payoff Period Matters
Unlike a fixed-term loan, MCA repayment speed depends on your daily revenue. The holdback percentage (typically 10–20% of daily credit card or bank deposits) stays fixed. If sales are strong, you pay off faster — which can mean a higher effective APR even though the nominal cost is the same.
If sales slow down, you pay off slower — which means a lower APR but prolonged cash flow stress.
Why MCAs Are Legal Despite These Rates
Merchant cash advances are structured as the purchase of future receivables, not loans. This classification matters because it exempts them from state usury laws that cap interest rates on loans. Several states have introduced disclosure requirements and registration rules for MCA providers, but federal usury protection does not apply.
When an MCA Might Make Sense
MCAs are fastest and most accessible financing for businesses that can't qualify for traditional loans — very low credit scores, less than 6 months in business, industries that traditional lenders won't touch. In a genuine emergency, a 100% APR for 90 days may be worth it.
The mistake is using an MCA as routine operating capital. At these rates, the financing cost can exceed business profit margins.
Bottom Line
Before signing any MCA agreement, run the numbers. Use the MCA true cost calculator to see the exact APR on your offer. Then check whether an SBA Microloan, business line of credit, or SBA 7(a) loan is accessible — all three carry dramatically lower rates.
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