An MCA is a cash advance to a company in exchange for a share of future sales or receivables. While a merchant cash advance may look and feel like a loan, and the terms “borrower” and “lender” are common lingo when referring to them, an MCA is technically not a loan. Among other factors, a typically structured MCA does not guarantee the issuer regular payments over a fixed, finite term.

When a company receives a merchant cash advance, the business receives from the MCA lender a one-time, lump-sum payment, an advance. The advance is then multiplied by a factor rate to calculate the payback amount, the total funds the company is obligated to repay to the MCA provider. Factor rates typically range between 1.1 and 1.5 and are based on the financial strength and risk of the business.

ØFollow the Math: An advance of $100,000 with a factor rate of 1.4 equals a payback amount of $140,000. This is the amount the company will owe in total to the MCA over the life of the funding.

With most loans or notes, interest expense is determined by a contractually fixed or variable interest rate. MCAs work differently. The amounts and timing of MCA repayments are determined by the holdback rate and repayment period. The holdback rate may be structured as a percentage of sales, often ranging between 10 to 20 percent of sales, or a fixed dollar amount. Repayment periods can range widely, though 12- to 18-month periods are common. Remittances are usually daily or weekly.

ØFollow the Math: Our company owes the MCA a total of $140,000. Assuming the business generates an average of $75,000 in sales per month ($2,500 per day), if a 10% holdback rate was applied with daily remittances, the business would owe $250 per day to the MCA until it reached a total payback of $140,000 which, in this case, equates to a repayment period of approximately 18 months.

If structured as a percentage of sales, repayment rates could potentially increase or decrease based on sales performance, subject to periodic reconciliation. A reduction in the repayment amounts would extend the repayment period, all other factors constant.

To assess an MCA’s true cost of capital, convert the payments to an implied annual percentage rate (APR). Implied APRs for MCAs can range in the high double digits (in many cases over 50 percent) or even to triple digits (as high as 200 percent or more).

ØFollow the Math: Our MCA provided our company an advance of $100,000 with a factor rate of 1.4 and an 18-month repayment period, equating to a payment of $250 per day. Using a financial calculator, the implied APR is computed to be 47 percent. If, for example, the repayment period was shortened to 12 months and the holdback rate increased to 15%, the implied APR would be 70 percent.