How to Read Your Merchant Cash Advance Calculator Results
- Factor rate: The factor rate is what merchant cash advance providers use to determine the total amount you’ll need to repay. The factor rate for a merchant cash advance typically ranges from 1.1x to 1.5x the amount advanced. If you receive a factor rate above 1.5x you may want to consider an alternative working capital loan.
- Holdback percentage: The holdback percentage is an input into the MCA calculator, and is the amount the MCA provider will collect daily on your credit card receipts. The typical range for the holdback percentage is 8% to 30%, with the average falling in the 15% to 20% range.
- APR averages: The APR output is the most important output provided by this calculator, as it allows you to compare the costs of a merchant cash advance to the costs of other financing products. APRs on merchant cash advances typically fall in the range of 80% to 120%. Anything below 80% would be considered a good APR for an MCA. If you receive APR values above 120% you may want to consider an alternative funding source.
- Repayment term averages: Typical repayment terms for a merchant cash advance can range anywhere from three months to 24 months. The faster a merchant cash advance is repaid, the higher the effective APR for that advance. If you find your estimated repayment term is longer than 24 months, you may want to consider a short-term loan.
- Next steps: Once you have used the MCA calculator to determine what a merchant cash advance may cost you, and what the estimated APR is, you can use this information to weigh the costs against some MCA alternatives. Knowing how much a merchant cash advance will cost your business will allow you to make a more informed financing decision.
Note: If you’re struggling to pay off a merchant cash advance and would benefit from a low-rate, long-term loan with monthly payments, read our article on refinancing business loans.
How the Merchant Cash Advance Calculator Works
The costs associated with a merchant cash advance can be confusing and are not easily compared to other financing options based on the information given to you by the MCA provider. Our MCA calculator produces an estimated APR for your MCA based on the advance amount, factor rate, fees, holdback percentage, and your monthly credit card sales. This should allow you to easily compare costs between MCAs and other business loans.
MCA Calculator Inputs
In order to get the most accurate calculations regarding the costs of your merchant cash advance, you will need to input a few different values. You will need to know the estimated advance amount, the factor rate, the value of any additional fees (whether a fixed value, or as a percentage of the advance amount), the daily holdback percentage, and the amount of your average monthly credit card sales.
The information you will input into the MCA calculator includes:
Amount of Merchant Cash Advance
The amount of your merchant cash advance is the primary input for the calculator and is the number from which all of the formulas derive. The amount advanced is used in conjunction with the factor rate and other fees to determine the total cost of capital on your merchant cash advance.
The primary fee charged by a merchant cash advance provider is the factor rate. This rate is charged in lieu of interest on the advanced funds. The factor rate is expressed as a multiple of the advance amount (e.g., 1.25x). To determine the repayment amount due on a merchant cash advance, you multiply the advance amount by the factor rate.
For example, if you were to receive an advance of $10,000 at a factor rate of 1.25x, the total amount of repayment would be $12,500. This amount is pre-determined at the onset of the advance, and is payable regardless of how quickly the advance is repaid. This differs from an interest rate, which is charged on the balance as long as it’s outstanding.
Other Merchant Cash Advance Fees
If the merchant cash advance provider charges fees in addition to the factor rate, they would be entered here. Some MCA providers charge a fixed fee, and others charge a fee as a percentage of the amount advanced. You can enter a value in either field. This value is then added to the factor fee and results in the total financing cost.
The holdback percentage is the percentage of your daily credit card receipts the merchant cash advance provider will collect daily to repay your advance. For example, if you have $5,000 in credit card sales today, and you have a holdback percentage of 15%, the MCA provider will apply a $750 ($5,000 x 15%) payment on your advance.
Average Monthly Credit Card Receipts
Your average monthly credit card receipts will be used in conjunction with the holdback percentage to determine your estimated daily payment amount. The monthly amount will be multiplied by the holdback percentage and divided by 30 (days per month) to determine your estimated daily payment amount.
Estimating this number as accurately as possible will give you a more reliable estimated repayment term, and ultimately a more accurate APR calculation. If you are obtaining a merchant cash advance as you are going into a slower business season, you may want to use monthly projections that more closely match your expectations for the slower months.
MCA Calculator Outputs
The MCA calculator generates seven outputs based on the information that you input. The most important output is the estimated APR which allows you to more accurately compare the cost of a merchant cash advance to other lending options. Additionally, the calculator generates the total financing cost, the factor fee, the daily percentage rate and payment amount, and the repayment term measured in both days and months.
The outputs produced by the MCA calculator are:
The most important output that this merchant cash advance calculator provides is the estimated annual percentage rate of your advance. The annual percentage rate is calculated by dividing the total cost of financing by the amount of advance and dividing that quotient again by the number of days it will take to repay the advance multiplied by 365 (days in one year).
Because the factor rate charged by the MCA provider is not deemed as interest, but rather a fixed fee, providers are not required to provide you with an APR for the advance. Calculating the equivalent APR for a merchant cash advance allows you to more accurately compare the pricing to other financing options that may be available to you.
Total Financing Cost
The total financing cost for your merchant cash advance is equal to the amount of the advance multiplied by the factor rate, plus any additional fees. This is the total amount you’ll repay your merchant cash advance provider. This amount is determined upfront and is payable regardless of how quickly the advance is repaid.
Total MCA Fees
The factor fee is the total amount of fees you’ll pay the merchant cash provider. This includes the fees you’ll pay based on the factor rate, as well as any other fees, such as origination fees. You can think of this as the cost of receiving the capital you need to fund your business.
Let’s say your business borrowed $30,000 at a factor rate of 1.25 with other fees of 1%. Your total merchant cash advance fees would equal $7,800.
The total MCA fee calculation is as follows:
|Factor Fee: (1.25 - 1.0) x $30,000||$7,500|
|Other Fees: (1% x $30,000)||$300|
|Total MCA Fees||$7,800|
Daily Payment Percentage Rate
The daily payment percentage rate is the percentage of the total repayment you will repay daily based on the information you provided. It is calculated by dividing the total financing cost by the amount of the advance, and dividing that result by the estimated number of days that it will take to repay the advance.
Daily Payment Amount
Based on the amount you input for your average monthly credit card sales and the holdback percentage, the MCA calculator generates an estimated daily payment amount. This is the amount you can expect the merchant cash advance provider to collect daily from your credit card processor. It is important to note this is not a fixed amount but will fluctuate daily based on actual credit card receipts.
Length of Repayment Term in Months
This value represents the estimated number of months it will take for you to repay the merchant cash advance. The value is calculated based on the amount of the advance, the total financing cost, and the daily payment amount. The typical repayment term of a merchant cash advance is between three and 24 months.
Length of Repayment Term in Days
This is the number of days that it will take you to repay the advance plus fees based on the input monthly credit card sales and holdback percentage. Generally, it will take between 90 and 720 days to repay a merchant cash advance.
When to Use the Merchant Cash Advance Calculator
Using the merchant cash advance calculator can be helpful in evaluating how much an MCA will cost your business. Whether you already have an MCA and are curious about what the effective APR on it is, or if you are considering getting one and want to know how the cost compares to another form of financing, this calculator can help you be informed.
Being able to translate the total financing cost of a merchant cash advance into an equivalent APR allows you to perform an apples-to-apples comparison to other potential financing offers. While the APR likely won’t be your only deciding factor when you are choosing financing, the commonality of the APR as a measurement tool will make the costs more comparable.
What’s Not Included in the MCA Calculator
The merchant cash advance calculator does not take into account fluctuations in your monthly credit card receipts, but rather bases the calculated outputs on a monthly average. If your credit card receipts vary greatly month-over-month, the length of repayment may be different from what is predicted by the calculator. A change in repayment length will impact the overall APR calculation provided.
For example, if your average monthly credit card receipts are based on annual receipts divided by 12, and you have a seasonal business this could impact the accuracy of the calculation. In this case, you would most likely be applying for the advance during your slow season when credit card sales are lower. Therefore, your daily payments on the advance would also be lower than the average that the calculator is using. You can adjust for this by lowering the amount of the monthly credit card sales in the calculator to reflect a more accurate projection.
What a Merchant Cash Advance Is
A merchant cash advance is a financing product wherein an MCA provider advances you funds upfront in exchange for a fixed percentage of your daily credit card receipts. MCA providers charge a cost of capital of 1.1x – 1.5x the advanced amount (80% – 120% APR), and repayment is deducted automatically from your credit sales.
With a merchant cash advance (MCA), the provider purchases a portion of your future daily credit card receipts and advances you those funds upfront. The provider then collects a percentage (8% to 30%) of your daily credit card receipts as payment, until the factor rate (typically 1.1x to 1.5x of the amount advanced) is repaid.
Pros & Cons of Merchant Cash Advances
There are some advantages to a merchant cash advance. You can receive funding quickly, MCAs are relatively easy to qualify for, and applying is easy. However, the overall expense of an MCA is often much higher than other short-term financing options. The high cost of capital, coupled with the irregularity of the daily payment amounts, can turn the short-term solution of an MCA into a long-term need.
Pros of a Merchant Cash Advance
Some of the benefits of an MCA are:
- Funding is quick: Merchant cash advances are one of the fastest ways for a small business to receive financing. You can often receive the advance within 48 hours of applying.
- Applying is simple: Merchant cash advance applications can be completed online in just a few minutes, and require very little additional documentation.
- Qualifying is easy: Compared to other financing options for small businesses, merchant cash advances have very minimal qualification requirements, making them much easier for businesses to be eligible for.
Cons of a Merchant Cash Advance
Some of the drawbacks of an MCA are:
- Financing costs are high: Due to the factor rate on merchant cash advances, this type of financing can often have APRs in the triple digits (120% or greater), depending on how quickly the advance is paid off. Comparatively, short-term loans generally have APRs closer to 30% to 50%.
- Payments are uneven: Payments are based on a fixed percentage of your daily credit card sales. As such, your total payment toward the advance can vary significantly from day-to-day and month-to-month, making it difficult to budget your payment amount.
- Solution is short-term: While you can receive funds quickly to cover your immediate working capital needs, the high daily percentage withdrawal from your credit card receipts and high repayment costs can become an overwhelming burden to your business. Make sure you can afford the fees before applying.
A merchant cash advance (MCA) is an expensive financing option and is typically only used by small businesses due to the low qualification requirements or fast funding speed offered. However, there are many alternatives to an MCA that can provide funding faster than many MCA providers and at a lower cost. An MCA should therefore only be used as a last resort.
Alternatives to a Merchant Cash Advance
Merchant cash advances are an expensive form of financing. If you are able to qualify for an alternative financing option, you will generally receive more manageable rates and terms. Some alternatives to merchant cash advances include a small business line of credit, Square Capital, or PayPal Capital.
Possible alternatives to a merchant cash advance include:
- A small business line of credit: Some of the best small business lines of credit offer up to $250,000 in revolving funds to help your small business meet its working capital needs.
- Square Capital: Similar to a merchant cash advance, Square Capital allows you to borrow up to $100,000 against your future credit card sales.
- PayPal Capital: PayPal Capital allows you to borrow up to $125,000 against your future PayPal sales. Like a merchant cash advance, payment is deducted daily from PayPal sales.
Merchant cash advances can be a costly form of financing for a small business, and the expense of repayment can often lead to a slippery slope of additional financing needs. Using the MCA calculator to understand the costs involved with a merchant cash advance can better prepare you to compare this form of financing to other small business financing options, allowing you to make the best choice for your business.
If you are looking for a merchant cash advance provider that does not charge additional fees and can quickly fund your advance, National Funding is a great choice. You can receive an MCA of up to $250,000 with a factor rate ranging from 1.17x to 1.36x in as little as 24 hours.