Merchant cash advances are priced with a factor rate rather than an interest rate. The factor rate multiplies the amount advanced to give the total you repay. Because it does not depend on time, you cannot compare it with a loan's APR without also knowing how fast you repay.
The basic math (illustration only)
This is an illustration of the arithmetic, not a quote. Real factor rates and fees vary by funder and file.
| Item | Illustration |
|---|---|
| Amount advanced | $50,000 |
| Example factor rate | 1.30 |
| Total to repay (advance x factor) | $65,000 |
| Cost of the advance | $15,000 |
| Fees listed in the offer | Added to the cost |
Why APR needs the term
The same $15,000 cost is spread across the repayment period. If you repay in four months, that cost is concentrated in a short window, so the annualized figure is much higher than if you repay over twelve months. A factor rate alone hides that, which is why the term matters as much as the rate.
What to compare across offers
- Total repayment in dollars. The one number that does not depend on how it is quoted.
- Expected repayment period. Shorter terms raise the annualized cost for the same dollars.
- Payment size and frequency. See daily vs weekly payments.
- Fees. Origination, processing or other fees in the offer add to the cost.
- Cash you actually receive. A payoff of an old advance reduces it.
For a longer explanation see business funding factor rates explained.