Guide · What it costs
What is the APR of a merchant cash advance?
By Alex Makowski Updated
There is no APR on the paperwork because an advance is legally a purchase of receipts, not a loan, but you can compute the equivalent. Repaid daily, a 1.3 factor over four months works out near 160 percent APR; the same 1.3 over eight months near 80 percent; a 1.25 over six months roughly 90 percent. The factor is the fee. The term is what turns it into a rate, and a shorter term makes the same fee a much higher APR.
In this guide
- 01Why the number is so large, and why it is also not the whole story
- 02How to compute yours
- 03What to compare instead of APR alone
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01
Why the number is so large, and why it is also not the whole story
APR expresses cost per year. An advance charges its whole fee in months, and repays daily, so the average balance outstanding is about half the amount advanced. Both things push the annualized figure up. $50,000 at 1.3 is $15,000 of cost; spread over four months of daily payments, that is a yearly rate near 160 percent. Spread over eight months, near 80. The fee did not change. The speed did.
The number is real and worth knowing. It is also worth knowing what it is not: an interest rate you keep paying. The fee is fixed at signing, so the APR is the cost of the money for the months you had it, and it does not compound or continue. A business that turns $50,000 of stock into $80,000 of sales inside the term paid $15,000 to do it, whatever the annualized figure says.
Cost of $50,000, by product
02
How to compute yours
Total repayment minus the amount received is the cost. Divide by the amount received for the cost as a fraction. Divide by the term in days and multiply by 365 for a simple annualized rate; a true APR that accounts for daily repayment is close to double that, because on average only about half the money is outstanding. $10,000 at 1.25 with a $300 fee: $12,800 back, $2,800 cost, 28 percent of the amount; over 180 days that is about 57 percent simple and around 100 percent as a true APR.
Our calculator does this for any amount, factor and term, and shows the comparison against the other three products.
03
What to compare instead of APR alone
Total dollars repaid over the term, for each offer, including fees. Whether the fee is fixed or accrues. What the money produces inside the term. And what the alternative actually is: not a bank loan at 9 percent you were declined for, but the cost of not having the money this week. APR is the right tool for comparing two advances of different lengths. It is the wrong tool for deciding whether to take one at all, because it annualizes a decision that lasts six months.
Written by
Alex Makowski, Owner
Alex Makowski owns and runs Business Loans for America and has been placing funding for U.S. small businesses since 2021. Businesses he has worked with have secured $50M+ in financing across 1,200+ placements. He writes and reviews every guide on this site.
FAQ
Related questions.
- Why won't the funder tell me the APR?
- Because an advance is not a loan and APR is a loan disclosure; most funders do not compute it. In a dozen states they must now disclose an annualized rate or its equivalent in a standard form. Ask for the total repayment in dollars anywhere; that number is always available.
- Is a 1.2 factor a 20 percent interest rate?
- No. It is a 20 percent fee on the amount, charged over the term. Over twelve months with daily repayment that is roughly 40 percent APR; over four months, roughly 110 percent.
- Does repaying early lower the APR?
- It raises it. The fee is fixed, so paying the same fee over fewer months is a higher annualized rate. It saves nothing in dollars unless the contract includes an early-payment discount.
Guides
More on what it costs
The fees around the rate
An origination fee of a few percent, ACH and underwriting fees, and sometimes a broker fee. On a small advance they outweigh the factor.
The daily payment, computed
Total repayment divided by business days in the term. $65,000 over 126 days is $516 a day.
$50,000, four ways
$15,000 on an advance over six months, or $12,000 to $17,000 on equipment spread over five years. Same money, different jobs.
Short term or long term
Longer usually costs more in total and less per week. The right answer is the longest term whose total you can stomach.
The price of equipment money
Close to bank pricing for a strong file, into the twenties for a startup or a low score. The machine is why.
Lower factor, not always cheaper
A 1.2 with high fees and a four-month term can cost more per month than a 1.3 over ten. Compare in dollars.
Sources
- Consumer Financial Protection BureauFederal consumer-finance regulator. Publishes guidance on credit terms and disclosure.
- New York DFS — Commercial Finance Disclosure Law, 23 NYCRR 600The regulation itself, including the duties it places on brokers.
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