How the cost is actually structured
The funder advances a sum and buys a fixed dollar amount of future receipts - the advance multiplied by a factor rate, typically between 1.15 and 1.50. Repayment comes as a percentage of daily card settlements or as a fixed daily or weekly ACH debit until the purchased amount is delivered in full.
Because there is no interest accruing on a declining balance, paying early does not reduce the amount owed under most agreements. That single feature - no benefit to early repayment - is what most sharply distinguishes an advance from a loan, and it is frequently misunderstood at signing.
The regulatory picture
The Federal Trade Commission has brought a series of enforcement actions against merchant cash advance funders for misrepresenting the amount a business would receive, for enforcing personal guarantees while advertising that none were required, and for collection practices - resulting in industry bans and multi-million-dollar redress orders.
Several states, New York among them, now require standardised disclosures on commercial financing including advances, so that a business can see an estimated APR and total cost before signing. Where those disclosures exist, read them; where they do not, ask for the same figures in writing.
When it is nonetheless the right call
There are genuine cases: a restaurant whose walk-in freezer dies on a Friday, a retailer with a one-week window on discounted inventory that will turn at a margin well above the advance's cost. The test is whether the use of funds generates a return greater than the true APR, over a shorter period than the repayment term.
If the answer is that the money covers a shortfall rather than funding a return, an advance usually deepens the problem, because the daily debit reduces the cash available to fix it.
Commonly used for
- Genuine emergencies where no cheaper capital can arrive in time
- Short, self-liquidating opportunities with a return above the advance's true cost
What to check before signing
- Early repayment usually saves nothing - the purchased amount is fixed
- Daily debits reduce operating cash immediately and permanently until delivered
- Stacking multiple advances is the most reliable route to insolvency in this market
- Confession-of-judgment clauses, where still permitted, allow a funder to obtain judgment without a hearing
MCA: common questions
- Is a merchant cash advance a loan?
- No. It is structured as a purchase of future receivables. This is why it is priced with a factor rate rather than an interest rate, and why usury caps and lending licences generally do not apply to it.
- What APR does a 1.3 factor rate work out to?
- It depends entirely on the repayment period. A 1.3 factor repaid over twelve months is roughly a 55% APR equivalent; the same factor repaid over six months is roughly 120%. The shorter the term, the higher the APR for the same factor - which is the opposite of most people's intuition.
- Can I pay it off early to save money?
- Usually not. Most agreements fix the total purchased amount regardless of timing. Some funders offer a discount for early delivery, but it is a concession, not a right, and it must be in the contract.