Why is a merchant cash advance costed differently?

2 min read

Factor rateNot an APR

Repaid from takingsA % of sales

FlexibleSlow week, pay less

Effective rate highConvert to compare

How an MCA is priced

A merchant cash advance does not use an interest rate in the usual sense. You are advanced a sum, and a factor rate — say 1.3 — is applied to set the total repayable. You then repay by handing over an agreed percentage of your daily or weekly card takings until the total is cleared. Because the cost is a flat multiple fixed at the start, it is not an APR, and comparing it to one at face value is misleading. See APR vs factor rate.

The flexibility, and its price

The appeal is that repayments flex with sales: a quiet week repays less, a busy week more, so the facility never demands a fixed sum during a lean spell. That is genuinely useful for seasonal or variable card-based businesses. The trade-off is cost — because the repayment period is short and variable, the effective annual cost of an MCA can be high once converted to a comparable basis. Convenience and flexibility are being paid for.

Comparing it properly

To judge an MCA against other finance, convert the factor rate and expected repayment period to an approximate annual cost, or at least to a total repayable you can weigh. A '1.3 factor over four months' is a very different annual cost from the same factor over twelve. Only then can you compare it to a term loan or facility. See why flat isn't APR and use the true cost calculator.

If a steady term loan might suit better, compare it — get a quote.

Frequently asked questions

Is a merchant cash advance expensive?

It can be, in effective-rate terms, because the flat factor rate over a short, variable period often converts to a high annualised cost. What you are paying for is convenience and repayments that flex with your sales. For a card-based business that values that flexibility and repays quickly, it can be worth it; for a steady need, a term loan is usually cheaper. Always convert to a comparable basis before deciding.

Can I repay a merchant cash advance early to save money?

Usually not much — the total repayable is set by the factor rate at the outset, so unlike a reducing-balance loan, clearing an MCA faster rarely reduces the amount owed unless the agreement includes an explicit rebate. Repaying early frees you from the facility sooner but often does not cut the cost. Check the specific terms before assuming an early-repayment saving.