A funder has offered you $50,000 at a 1.30 factor rate, repaid daily over about eight months. The rep called it "thirty points," said the payment is manageable, and moved the conversation along. This article stops the conversation and does the multiplication, because the arithmetic of a merchant cash advance is short, and every part of it is knowable before you sign anything.
We arrange advances, so this is not a takedown of the product. It is the cost, worked all the way through, the way we would want it worked through for us. Every number below is a round, invented example chosen to keep the math visible. Your offer will differ, and you can run your own numbers in the MCA cost calculator in about a minute.
The three numbers that define the deal
Strip away the paperwork and an advance is defined by three numbers: the advance amount, the factor rate, and the payment schedule. Everything else on the agreement, and everything the rep says on the phone, is commentary on these three.
Notice what is missing: an interest rate. A factor rate is not an interest rate, and the difference is not pedantry. Interest accrues over time, so a loan costs less if you clear it sooner. A factor rate is a multiplier applied once. The whole cost of the advance exists the moment you sign, whether the money is out for eight months or eight weeks.
- Advance amount: $50,000. What the funder agrees to send, before fees are taken out of it.
- Factor rate: 1.30. The multiplier. Advance times factor equals what you owe.
- Term: about eight months. Repaid through automatic payments each business day, roughly 168 payments in all.
Multiplication one: factor rate to payback
Multiply $50,000 by 1.30 and you owe $65,000. The cost of the money is the difference: $15,000. That number deserves a moment of quiet. It is fixed the day you sign, it does not shrink if business is good and you finish early, and it comes out of future revenue that has not been earned yet.
The fixed-cost structure has a consequence people miss. If you repay the advance in month three instead of month eight, the standard contract still collects the full $65,000, which means you paid $15,000 for three months of money instead of eight. Some agreements include a prepayment discount schedule that reduces the payback at early milestones. If yours does not, ask for one in writing before signing, and treat the answer as information about who you are dealing with.
Multiplication two: payback to the payment that hits your account
Divide $65,000 by roughly 168 business days and the funder debits about $387 every business day. A typical month has around 21 business days, so the advance drains about $8,127 a month from your operating account, every month, for eight months.
This is the number that decides whether the advance helps you or hurts you, and it has to be compared against the right base. Not revenue: free cash flow. If your business clears $12,000 a month after rent, payroll, inventory and everything else, an $8,127 payment leaves $3,873 of breathing room and one slow week takes most of it. The payment affordability checker exists for exactly this comparison, and it is worth five minutes before any signature.
Weekly payment schedules exist too, and they change the rhythm without changing the total. $65,000 over about 34 weeks is roughly $1,912 a week. Easier to plan around, identical in cost.
Why thirty points is not thirty percent a year
Here is where most explanations stop and where the real math starts. $15,000 of cost on $50,000 looks like 30% for the deal, and since the deal runs eight months, a reasonable person scales it up and lands near 45% for a full year. That number is wrong, and it is wrong in the funder's favor.
The reason is that you do not keep the $50,000 for eight months. Repayment starts almost immediately, so your balance falls every single day. You start with all of the money and end with none of it, paying evenly the whole way, which means that on average you had use of only about half the advance, roughly $25,000. So the honest question is: what does it cost to use about $25,000 for about eight months? Answer: $15,000, which is 60 cents per dollar over eight months. Scale eight months up to twelve and you land at roughly 90 cents per dollar per year. Expressed the way loans are expressed, this illustrative advance costs somewhere in the neighborhood of a 90% annualized rate, before fees.
You will almost never see that number printed on an offer, and there is a structural reason. The federal rules that force lenders to disclose an APR (Regulation Z, under the Truth in Lending Act) were written for consumer credit, and business-purpose financing generally sits outside them. A handful of states now require APR-style disclosures on commercial financing, but in most of the country nobody is obligated to annualize this for you. The calculator does it in one click, which is precisely why we built it.
And fees push the real figure higher still, because they come out of the $50,000 before it reaches you while the $65,000 payback stays fixed. That mechanism is its own article: the fees nobody explains.
What the same $50,000 costs in other products
To judge whether $15,000 is expensive, put the same capital in other structures. These are illustrative rates, invented to make the comparison concrete: funders and lenders price by risk, and the same file can get very different quotes from different providers.
Suppose a three-year bank term loan at an illustrative 10% rate. Total interest on $50,000 comes to about $8,100, and that buys you three full years of the money instead of eight months. Suppose a line of credit at an illustrative 12% annual rate, drawn for ninety days to cover a gap: about $1,500, because a line charges you only while the money is out. An SBA-backed loan generally lands cheaper than both, and takes the longest of everything on this list to close.
So why does anyone take the advance? Because the comparison above quietly assumes you qualify for those products today and can wait for them. Many businesses holding an MCA offer cannot get the bank loan at all right now, and many that could cannot wait the weeks it takes. The honest comparison is never "MCA versus the cheapest product on paper." It is "MCA versus the products this business can actually get, at the speed this problem actually requires." Sometimes that list has one thing on it.
When paying it is the right call anyway
There are situations where $15,000 of cost is a good trade, and pretending otherwise would be its own kind of dishonesty.
The clean case is margin you cannot capture otherwise. A distributor offers you inventory you know you can sell for a $60,000 gross margin, payment due this week. Funding the buy with a $15,000 cost of capital leaves $45,000 of margin you would not have had. The math survives even at an ugly annualized rate, because the rate matters less than the gap between what the money costs and what the money earns, and here the gap is wide.
The same logic covers a contract deadline that unlocks a profitable job, a repair that gets a revenue-producing machine back online, or bridging a large receivable from a customer who reliably pays. What the logic never covers is using an advance to fund ongoing losses. If the business loses money every month, borrowed money at any price buys time and nothing else, and the daily payment makes each month worse than the last. We say more about that line in when we tell clients not to take funding.
A workable test: the money should buy something worth clearly more than the money costs, with room left over for things to go wrong, and the payment has to fit inside real free cash flow. Both parts, not one.
Run your own offer before you sign
Every number in this article came from three inputs and a fee schedule, and yours will too. Pull the advance amount, the factor rate and the payment schedule off your agreement, find the fee section, and run the sequence below. If you are weighing more than one offer, the offer comparison tool puts them side by side on true cost, and this framework helps you decide what expensive actually means for your situation.
How to work out the true cost of a merchant cash advance
Pull the three defining numbers
Find the advance amount, the factor rate and the payment schedule in the agreement itself, not the email or the phone call. If any of the three is not printed in the document, do not sign it.
Multiply for total payback
Advance times factor rate equals total payback. Subtract the advance from the payback to see the cost of the money as one plain dollar figure.
Subtract fees to get net funded
List every fee taken at funding: origination, professional service fees, wire fees, filing fees. Subtract them from the advance. The result is what actually reaches your account, while the payback stays unchanged, so fees quietly raise your true cost.
Divide payback into the per-payment amount
Divide total payback by the number of payments to get the daily or weekly debit, then multiply the daily figure by about 21 to see the monthly cash drain.
Compare the payment to free cash flow
Put the monthly drain against what the business actually clears after all expenses, not against revenue. The payment must fit with room to spare on a slow month, and the affordability checker makes this concrete.
Annualize and compare alternatives
Use the MCA calculator to see the annualized cost, then compare the offer against the alternatives you can actually obtain on your real timeline, not the cheapest product in theory.
Frequently asked questions
Is a factor rate the same as an interest rate?
No. An interest rate accrues over time on your remaining balance, so early repayment reduces the total cost. A factor rate is a one-time multiplier: the full cost is fixed when you sign, no matter how quickly you repay. That is why a factor rate and an APR can never be compared digit for digit, and why annualizing the cost matters so much.
Does paying off a merchant cash advance early save money?
By default, usually not: the payback amount is fixed, so finishing early means you paid the same dollars for fewer months of money, which raises the effective annual cost. Some contracts include a prepayment discount schedule that reduces the payback at early milestones. Ask whether yours does before signing, and get the schedule in writing.
Why does a 1.30 factor rate work out to roughly a 90% annual rate?
Because repayment starts immediately, your balance falls every day, and on average you have use of only about half the advance. In the worked example, $15,000 buys the use of roughly $25,000 for about eight months, which is 60 cents per dollar for two-thirds of a year. Scaled to a full year, that lands near 90 cents per dollar, before fees.
Do fees change the true cost of an advance?
Yes, and more than most people expect, because fees are deducted from the advance while the payback stays fixed. If $2,500 in fees comes out of a $50,000 advance, you received $47,500 but still owe $65,000, so your real multiple is higher than the printed factor rate. Always compute cost on the net amount that reached your account.