Ask ten business owners with a merchant cash advance how much they still owe, and most of them will give you a guess. That isn’t because they’re careless. When you take a cash advance, you’re paying a factor rate, not an interest rate. No APR on the contract, and rarely an easy-to-check balance.
A merchant cash advance (MCA) is a lump sum of cash you receive in exchange for a predetermined percentage of your future sales, plus a fee. It isn’t a loan in the traditional sense, and that creates confusion around the “real” amount that’s still outstanding.
Most owners who end up with an MCA took it for good reasons, since these advances can be approved in a day, need little paperwork, and don’t require physical collateral - which is why struggling businesses that don’t qualify elsewhere turn to them. MCAs offer the right blend of convenience, speed, and flexibility. And yet, they can be very confusing. Once you take an MCA, you might feel relieved that the cash is in the bank. But it’s likely that you won’t be satisfied for long. Most business owners make the same mistake: thinking an MCA is like a loan and they know how much they owe.
There are two ways the money comes back out of your business. The traditional way is a holdback: an agreed-upon percentage of your future credit card sales is held back and used to pay the advance and fee. How big a slice? Usually between 5% and 20%, and how long it takes depends on how much you sell. Most advances are repaid in three to 18 months. While this can help you pay off the cash advance faster if sales are high, it also means it’s hard to figure out how much is outstanding. The other option is a fixed withdrawal: the funding company itself periodically withdraws funds from your business account, daily or weekly, no matter what you sold. You’re paying off the balance at a fixed rate, and can quickly calculate the amount that still remains. Both setups can make it difficult to see how much your advance and fee have cost you, and to determine how much you still owe on it.
The Factor Rate
To work out what you really owe, start with the factor rate. Factor rates usually fall between 1.1 and 1.5, and they reflect a one-time fee, where a factor rate of 1.1 means you’re paying 10% back in fees. At 1.5, it’s 50%. The math itself is simple: you can easily see how many dollars you owe by multiplying the factor rate by the initial advance. If you received $50,000 at a factor rate of 1.4, your total repayment is $70,000, and $20,000 of that is fees. Then you subtract the money you’ve repaid. This can be more difficult than it sounds, because you have to track every dollar that comes in and out of your account.
That $70,000 is not always the whole story. Some MCA providers tack on extra charges - like admin or underwriting fees - on top of the factor rate, making the advance more expensive than it first appears. If yours does, you need to add them to the cost of the merchant cash advance. Your factor rate wasn’t random, either. MCA providers look at your industry, how long you’ve been in business, your business finances, your card sales and your personal credit score to decide your factor rate. The more risk you pose to the company, the higher your rate. That means more money you owe.
Don’t try to guess what you owe, or at least not without doing the math. Find the total repayment amount in your contract, then add up all the funding company’s withdrawals since you took the cash advance. Subtract the repayments from the total. This is how much you still owe. With a fixed withdrawal, it’s relatively easy to understand how much you still owe. With a holdback rate, you do know the percentage and you can easily track what portion of your sales have gone towards repayment. You have to dig out your sales records and multiply each day’s take home by the percentage. Adding that up over time, then subtracting it from the total is how you figure out how much is still left. Keeping track of how much you owe on your cash advance is hard, but it’s worthwhile.
One thing that surprises owners: the cost is usually fixed in advance - paying it early won’t change the total amount you have to pay back. Unlike a loan, you don’t save on interest by paying early, though some providers may give you a discount if you settle the advance quickly. It’s worth asking.
Your contract almost certainly won’t show an APR, which makes an MCA hard to compare with other financing. You might also want to look at this in terms of APR, although the math is a little more complicated. MCA APRs can be crazy high, up to 350%. If you take a $50,000 MCA at a 1.4 factor rate and repay by giving the funder 10% of your card sales each month, you’ll pay back a total of $70,000. When you sell more, you pay off faster, so your effective interest rate is higher; when you sell less, you take longer to pay, so the effective rate is lower. The charges don’t change either way. The high cost, plus payments that come out every day or every week, means it’s easy to fall further and further behind. That’s a quick way to end up with a debt spiral.
Regulation, or the Lack of It
Part of the reason the numbers are so murky is regulation, or the lack of it. Since a merchant cash advance isn’t technically a loan, it’s not regulated by the same federal laws as traditional loans. Some salespeople use deceptive tricks that can trip you up. The fine print matters most if you fall behind. Some MCA firms make you sign a confession of judgment so you give up your legal rights to fight or defend yourself in court. A confession of judgment allows the funder to take you to court and essentially win the case before you ever get in there. That is why defaulting on an MCA can be worse than defaulting on a traditional loan.
Struggling to Repay an MCA
Falling behind? The first rule is simple. Just remember, don’t ignore it. That makes it worse. If you’re struggling to repay an MCA, you can work out a deal with the MCA company to reduce or pause payments, or you can switch to a regular loan to replace it. That swap will likely cost you less over time. Whichever way you go, start from the real number. When you factor in how much you’ve repaid and the factor rate, you get an idea of what you really owe on the MCA.
