How merchant cash advance cost works
An advance is priced as a total, not over time. That makes it easy to compare badly. This is how to read one.
Start with total payback
The funder pays you an amount and you pay the funder a larger total. Subtract what you actually received from that total and you have the cost in dollars. Compare that figure, along with the number of business days it takes to pay, across every offer.
Factor rate is a term, not a price
Funders multiply the advance by a number called the factor rate to set the total. We define it here because you will see it in offers and in searches. It is useful for working out the total and for nothing else. Two offers with the same factor rate can cost very differently, because one may take six months to pay and the other three. The calculator shows the difference as an APR estimate.
What a daily payment does to cash flow
Payments usually come out every business day, or weekly. Your sales do not arrive evenly. A slow Tuesday and a busy Friday cost the same payment. Before you accept, take your worst recent week of deposits, subtract your payroll, rent, supplies and taxes, and see whether the payment still fits. If the answer is no, the advance can create the cash problem it was meant to fix.
Fees
Some agreements deduct fees from the amount you receive: origination, underwriting, administration or others. They do not reduce the total you pay, so they raise your real cost. The calculator has a field for them. Ask for a line-by-line list of what comes off the top.
Paying early
With many advances the total is fixed when you sign, so paying early may not lower it. Some funders offer a discount for early payoff and some do not. If you plan to pay quickly, get the early payoff terms in the agreement, not by phone.
What to ask a funder before signing
- What is the total I will pay, and what exactly do I receive after fees?
- How many business days is that based on, and how is the payment set?
- Is the payment fixed or tied to sales, and can it be adjusted if my sales fall?
- Does paying early lower the total, and what is the process?
- Does the agreement put a lien on my business assets or receivables?
- Am I personally liable for anything, and under what conditions?
- What happens if I miss a payment or switch bank accounts?
- Will you check my credit, and when?
An advance is a purchase of future receivables, and payment terms are set by the funder's agreement. Read the agreement itself, not the summary, and take it to an accountant or attorney if you can. This page is general information, not advice.