# Merchant cash advance: how to calculate the true cost

**Short answer:** A merchant cash advance quotes a factor rate, not an interest rate (Federal Reserve Board, 2025). Subtract the advance from the repayment to find the cost, then annualize it. In the example below, a 1.30 factor repaid over six months works out to roughly 110% a year.

Canonical page: https://www.sbaexpress.loans/guides/merchant-cash-advance-true-cost/
Last checked: 2026-11-09

## On this page

- [What a merchant cash advance is](#what-a-merchant-cash-advance-is)
- [The arithmetic, step by step](#the-arithmetic-step-by-step)
- [Costs and terms beyond the factor rate](#costs-and-terms-beyond-the-factor-rate)
- [What the law requires them to tell you](#what-the-law-requires-them-to-tell-you)
- [When an advance is a bad idea](#when-an-advance-is-a-bad-idea)
- [When one might make sense](#when-one-might-make-sense)

## What a merchant cash advance is

A merchant cash advance, or MCA, is styled as the purchase of a business's future receivables. FTC staff describe it as often repaid daily from a fixed percentage of daily sales. The provider quotes a factor rate, and you repay the advance multiplied by that factor.

Federal Truth in Lending APR disclosure generally does not apply to small business financing, MCAs included (FTC staff, 2020). The Federal Reserve Board adds that a factor rate is not comparable to an APR or an interest rate (2025). So you have to convert it yourself.

In the Federal Reserve Banks' 2026 survey, 8% of employer firms applied for a merchant cash advance in the prior 12 months.

## The arithmetic, step by step

Suppose you take a $50,000 advance at a 1.30 factor, repaid in equal daily debits over six months, or 126 business days. This is an illustration, not a quote.

1. Repayment: $50,000 × 1.30 = $65,000.
2. Cost: $65,000 − $50,000 = $15,000, which is 30% of the advance.
3. Daily debit: $65,000 ÷ 126 = $516.
4. Average amount you owe: you repay a little each day, so the balance falls from $50,000 to zero. The average is about half, or $25,000.
5. Cost for the period: $15,000 ÷ $25,000 = 60% for half a year.
6. Annual figure: 60% × 2 = 120%.

The exact APR formula treats each daily debit as its own payment. It gives about 109% for this schedule, assuming 252 business days a year. The shortcut runs a little high, but both land far above the 30% on the contract.

Stretch repayment to 12 months and the debit falls to $258 a day. The same $15,000 costs about 60% by the shortcut and 55% by the exact formula. Repay in three months and the exact APR passes 200%. If the fee is fixed, paying early saves nothing, so check the contract for any early-payoff discount. FTC staff report that Federal Reserve staff found some owners wrongly assumed paying early would save money.

Fees change the picture. Suppose the provider holds back a 3% fee, which is $1,500. You receive $48,500 and still repay $65,000. The cost becomes $16,500, or 34% of the cash you received.

The Federal Reserve Board cites one lender's advertised 1.15 factor rate, which amounted to an undisclosed estimated APR of about 70%.

## Costs and terms beyond the factor rate

- **Fees.** Fees can be deducted from the amount you receive. New York requires the net amount paid out to be disclosed (Financial Services Law § 803). Ask for the figure that will land in your account. In the Federal Reserve Banks' survey, 60% of online-lender borrowers said their actual cost was higher than expected, against 32% at large banks.
- **Payment mechanics.** Providers may take payments by automatic debit from your bank account or from card sales (Federal Reserve Board). Ask whether the debit is fixed or a share of sales, and how it adjusts when sales fall.
- **Stacking.** FTC staff describe owners taking out several advances against the same receipts to cover repayments.
- **Guarantees and collateral.** The FTC has alleged that MCA providers misrepresented funding amounts, collateral and personal guarantee requirements (FTC Business Blog, 2020). Read who is liable and what the provider can claim.
- **Confession of judgment.** This is a clause you sign in advance that lets a provider obtain a court judgment against you. The FTC has alleged that a provider used it against businesses that had not defaulted. Look for the clause.
- **Default terms.** Ask what triggers default and what happens to the unpaid balance.

## What the law requires them to tell you

Federal rules require no APR on an MCA. Some states do. California and New York are two.

- **California.** The rules took effect December 9, 2022. Covered providers, including MCA companies, must disclose the funding amount, the APR, the payment, the term and prepayment details. For products without a monthly payment they also give an average monthly cost (DFPI, June 14, 2022).
- **New York.** Sales-based financing offers must show the finance charge, total repayment and an estimated APR based on projected sales (Financial Services Law § 803). Exemptions apply, including financial institutions and transactions over $2.5 million (§ 802).

Other states have their own laws. If an offer shows no APR, ask for one in writing and for the method used to estimate it.

## When an advance is a bad idea

- **Cheaper credit is available.** Ask a bank or SBA lender first. The 7(a) variable-rate cap is Prime plus 3.0 to 6.5 percentage points, depending on loan size (13 CFR 120.214(d)).
- **The cash does not earn more than it costs.** Compare the cost with the profit the money will produce, not with your revenue.
- **You would pay one advance with another.** That is stacking. FTC staff link it to businesses struggling to meet repayments.
- **Daily debits take too much.** In the example the debit is $516 a day. If your daily deposits are $3,000, that is 17% of each day's deposits before you pay anyone else.
- **You may want an SBA loan soon.** SBA treats an advance as eligible for refinancing only if the agreement has been converted to a term loan, has amortized for at least 24 months and no new agreements followed; an active agreement is not eligible (SOP 50 10 8.1, App. 14, Para. A.3). On 7(a) Small loans, lenders review two months of bank activity, which shows sales-based repayments (Information Notice 5000-877673).

## When one might make sense

An advance can fit a short, one-time opportunity where you can show the cash earns well above its cost. You should also have compared it with a bank or SBA offer. You should be able to repay it without a second advance, and you should have read every term. Even then, convert the price to an annual rate before you sign.

## Sources

- [FTC staff, Strictly Business Forum: Staff Perspective (February 2020)](https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf)
- [Federal Reserve Board, Small Business Credit: How Entrepreneurs Finance the American Dream, Consumer & Community Context (March 2025)](https://www.federalreserve.gov/publications/2025-march-consumer-community-context.htm)
- [FTC Business Blog, Protecting small businesses seeking financing during the pandemic (Aug. 3, 2020)](https://ftc.gov/news-events/blogs/business-blog/2020/08/protecting-small-businesses-seeking-financing-during)
- [California DFPI, Commercial financing disclosure regulations approved, press release (June 14, 2022)](https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/06/Commercial-Financing-Disclosure-PR-June-2022.pdf)
- [New York Financial Services Law Section 803, sales-based financing disclosure requirements](https://www.nysenate.gov/legislation/laws/FIS/803)
- [New York Financial Services Law Section 802, exemptions](https://www.nysenate.gov/legislation/laws/FIS/802)
- [New York Financial Services Law Section 801, Commercial Finance Disclosure Law definitions](https://www.nysenate.gov/legislation/laws/FIS/801)
- [Federal Reserve Banks, 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey (published March 2026)](https://www.fedsmallbusiness.org/2026-report-on-employer-firms)
- [SBA Information Notice 5000-877673, Question 8, p. 3 (March 31, 2026)](https://legacy.sba.gov/document/information-notice-5000-877673-guidance-frequently-asked-questions-related-recent-sba-procedural-notices)
- [13 CFR § 120.214(d)](https://www.ecfr.gov/current/title-13/section-120.214)
- [SOP 50 10 8.1, App. 14, Para. A.3 (Para. A begins p. 355)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)