What is a Factor Rate?
Unlike traditional business bank loans that express costs as an annual percentage rate (APR) with compounding interest over years, Merchant Cash Advances (MCAs) express costs as a fixed factor rate decimal (typically between 1.18 and 1.35).
How to Calculate Total Cost
Total cost is calculated upfront and remains fixed, regardless of how quickly or slowly you fulfill the advance. The formula is simple:
Advance Amount x Factor Rate = Total Repayment Amount
For example, if you secure an advance of $30,000 with a factor rate of 1.22, your total repayment is $36,600 ($30,000 x 1.22). Your cost of capital is exactly $6,600.
Factor Rates vs. APR
- Fixed Cost: Factor rate cost does not change over time. APR compounding means costs rise if payment is delayed.
- Daily Flex: MCA repayments are tied to a percentage of sales. If sales drop, daily payments decrease, protecting cash flow. Traditional loans demand a fixed monthly payment regardless of sales.
- Term Length: MCAs are short-term (typically 3–12 months). Traditional bank loans have multi-year terms.
FSI
Funding Intelligence Analyst
Reviewed by the Funding Intelligence Team. We verify all sources, regulatory guidelines, and banking parameters to maintain the highest standard of accuracy.