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With a merchant cash advance (MCA), a funder purchases a portion of your future credit card sales at a discounted price and gives you a lump sum of money. Instead of an interest rate, the price shows up as a factor rate. You repay through a holdback, which is a specified percentage of each future day's card sales.
A factor rate is simply a flat multiplier locked into place when you enter into an agreement. To determine how much you owe on an advance, multiply the amount of the advance by the factor rate.
I've spent years helping business owners decide on the right financing. Below, I'll explain how you can evaluate the true cost of an MCA. We'll go over the process, one step at a time, so you can hold that proposal up against financing that could cost you substantially less.
If you don't want to do the math yourself, you can plug your information into our calculator below.
How To Calculate The Cost of a Merchant Cash Advance (MCA)
These six steps allow you to calculate the cost of your MCA on your own.
Step 1: Figure out the total amount to repay
Multiply your advance amount by your factor rate.
Step 2: Calculate the cost of capital
Subtract your advance amount from your total repayment amount.
Step 3: Convert it to a percentage
Divide your cost of capital by your advance amount.
Step 4: Estimate the length of time it'll take you to repay
Multiply your monthly card sales by your holdback percentage, and then divide your total repayment amount by that figure.
Step 5: Calculate your effective interest rate
Divide 365 by your repayment period in days, and then multiply that value by your percentage cost.
Step 6: Factor in any additional fees
Subtract any fees. This may include an origination charge or a processing charge. Then add that amount to your cost of capital.
Let's say you get $50,000 today at a factor rate of 1.35, along with a 15% holdback on daily card sales. Every month, your business reliably pulls in about $100,000 in credit card sales.
Here's what that calculation actually looks like:
| Advance amount | $50,000 |
|---|---|
| Factor rate | 1.35 |
| Total amount paid back | $67,500 |
| Cost of capital | $17,500 |
| Cost percentage | 35% |
| Payoff period | About 135 days |
| Effective APR | About 95% |
| Origination plus processing fees | $2,000 |
| Net amount | $48,000 |
| True total cost with fees | $19,500 |
| True effective APR | About 110% |
How Repayment Impacts Your Effective APR
Most merchant cash advances don't have a specific repayment period. The payoff period typically depends on the holdback percentage and the amount of credit card sales you make each day.
When you're having a strong month, your repayment is faster, and your effective APR goes up. When you have a slow month, your daily payments go down by the same percentage.
| Monthly card sales | Payoff period | Effective APR |
|---|---|---|
| $150,000 | About 90 days | About 142% |
| $100,000 | About 135 days | About 95% |
| $75,000 | About 180 days | About 71% |
Before signing any agreement, ask yourself the following questions:
The actual holdback percentage
When sales are slow, will there be a required or set daily payment?
What occurs with failed remittances?
Funds leave your bank account before payroll does. Consider the timing in relation to your cash flow.
Minimum Qualifications
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
MCA vs. Term Loan vs. Business Line of Credit
MCAs can be strong financing options when you need money quickly or don't qualify for traditional lending. But two other options that I see business owners gravitating towards include fixed-rate term loans and lines of credit.
Here's how all three compare.
Merchant cash advance
The most expensive option, but the most flexible when it comes to credit and speed.
Term loan
Comes with a disclosed APR and fixed payment, so you'll know the exact costs up front.
Business line of credit
A revolving line that you can use as needed, only paying interest on what you use.
When an MCA Makes Sense
MCAs can make sense when you need financing fast. Here are some situations where I've seen them be useful.
Short-term working capital gaps
Paying for payroll, rent, and supplier invoices during slow months
Emergency repair needs
Repairing broken-down equipment or autos
Seasonal hiring
Hiring employees temporarily in anticipation of seasonal demand
Fast-turn inventory
Buying stock that sells fast when your cash is tight.
Why Business Owners Choose an MCA
Most business owners say this is why they choose an MCA over other financing options.
Quick approval time
After being approved for funding, it takes as fast as same day to get your money
Less strict credit requirements
Clarify Capital accepts credit scores as low as 500 for MCAs
No collateral required
Future receivables secure your advance, not your equipment or building
Variable payments based upon sales volume
Slow weeks result in lower daily payments because the holdback is expressed as a percentage
Red Flags Before You Sign
There are lots of reputable lenders in the MCA industry, but there are some bad actors. Here's what I recommend my clients keep an eye out for.
An estimated APR isn't provided
If you ask about a comparable APR, they should be able to estimate it for you, no questions asked.
Repayment terms are unclear
The agreement should detail both your holdback percentage and payment frequency.
Surprise fees or charges
Origination and processing charges should be in the original quote and not a surprise at closing time.
Comparing an MCA to a Home Equity Line of Credit (HELOC)
One additional type of financing to consider is a home equity line of credit (HELOC).
A HELOC is a type of revolving line of credit secured by equity in your home that allows you to repeatedly borrow. A HELOC isn't a business loan. No one evaluates your ability to repay as a business owner. Instead, you use the proceeds from the HELOC to finance your business.
Here's how they compare.
| What you're comparing | MCA | HELOC |
|---|---|---|
| How it's priced | Factor rate of 1.35 | Rate as low as 6.75% |
| Cost of the money | $35,000 | $6,750 |
| Total dollars repaid | $135,000 | $106,750 |
| Time required for financing | As fast as same day | As quickly as one week |
| Collateral | None | Your home |
| Minimum credit score | 500 | 620 |
Run the Numbers Before You Commit to Financing
Each MCA offer boils down to what enters into your bank account, what you pay back, and what it costs you annually. Once you understand those figures, you'll have a better idea of how much an MCA offer costs.
Clarify Capital has partnerships with 75+ vetted, reputable lenders so you can compare offers from multiple lenders. Apply today and get the financing your business needs to move forward.
Frequently Asked Questions on MCAs
Here's what small- and midsized businesses (SMBs) tend to ask me about MCAs.
Are Merchant Cash Advances Expensive?
Yes, they can be. Especially compared to all other ways to finance a small business. Many MCAs have rates in excess of 100%. But MCAs do provide quick access to capital, which can be useful in a pinch.
What's the True Interest Rate (APR) on a Merchant Cash Advance?
Technically, there's no true interest rate. An MCA calculates your cost of capital using a factor rate. If you want to calculate a comparable APR, take your cost of capital ($67,500 - $50,000 = $17,500), divide by the original advance amount ($50,000), and multiply that result by 365 divided by the number of days it takes to repay the advance (135). This results in an APR of about 95%, and after deducting the origination and processing fees, an APR of about 110%.
Do Daily Payment Amounts Change the Total Repayment Amount?
No. The factor rate fixed your total repayment amount at the time you signed the contract. Daily payments merely accelerate or decelerate your repayment schedule, which can impact your effective APR. Faster card sales would increase the effective APR due to reduced repayment duration.
How Does a Factor Rate Differ From an Interest Rate?
An interest rate applies to your outstanding principal balance and accrues over time as you carry it. Making early payments can reduce your overall interest expense. A factor rate is a single multiplier that sets your total repayment obligation at the time of signing. Regardless of how quickly you settle your account, you still owe the original factor rate multiplied by the principal amount. A 1.35 factor rate means you still owe 1.35 times the amount advanced, or $67,500.
Will Paying Off an MCA Early Save Me Money?
In most cases, no. Since the factor rate establishes your total repayment obligation at the time of signing, reducing the length of time it takes to pay off an MCA typically will cause your effective APR to rise, since you're paying the same dollar amount over a shorter term. Some funders do provide discounts for repaying an MCA before its scheduled end date. Be sure to ask about any such discounts during the application process, and get them in writing within the agreement.
Is My Company's Financial Information Secure When Applying for an MCA?
Clarify follows SOC 2 security principles; your bank statements and business details stay protected throughout the application.
Bryan Gerson
Co-founder, Clarify
Bryan has personally arranged over $900 million in funding for businesses across trucking, restaurants, retail, construction, and healthcare. Since graduating from the University of Arizona in 2011, Bryan has spent his entire career in alternative finance, helping business owners secure capital when traditional banks turn them away. He specializes in bad credit funding, no doc lending, invoice factoring, and working capital solutions. More about the Clarify team →
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