A merchant cash advance (MCA) is a lump-sum payment received in exchange for a fixed percentage of daily credit card receipts. It’s an expensive form of credit and should only be used by businesses that cannot qualify for other types of business funding. In addition, the costs associated with MCAs can be confusing and aren’t comparable easily to costs associated with different types of funding.
To calculate those costs, you’ll need the estimated advance amount, the factor rate, the value of additional fees, the daily holdback percentage, and the amount of your average monthly credit card sales. You can use those values and the MCA calculator below to show the costs involved.
How To Read Your Calculator Results
- Annual percentage rate (APR): The most important result from the calculator, the APR, will allow you to compare a merchant cash advance with other types of financing. Anything below 80% would be a good rate for an MCA, although other types of financing have lower APRs.
- Total financing costs: This is the total amount you’ll be financing with the MCA—the loan amount plus any fees.
- Total MCA fees: This is the total amount of fees—factor fee and any other fees—you’ll pay with the MCA.
- Daily percentage rate and daily payment: This shows the percentage rate and payment broken down to a daily rate.
- Repayment terms in months and days: This is the term length in months and days for the MCA. If this term is longer than 24 months, you should consider a short-term loan instead.
- Effective interest rate: This is the effective cost of borrowing money for the MCA over the advance term. It takes the total fees, divides them by the advance amount, multiplies that by 365 to annualize it, and then divides it by the repayment term. If this number is higher than 120%, you should look for a different MCA provider.
The results show that merchant cash advances are a very expensive form of credit. Therefore, they should only be used as a last resort for business owners who cannot qualify for other types of credit. Before moving forward with a merchant cash advance, visit Lendio’s website to see if you qualify for a more affordable business financing product, as it offers a variety of options.
Merchant Cash Advance Calculator Inputs
To calculate the costs and APR associated with a merchant cash advance, you need to input several terms into the calculator. These include:
- Amount of MCA: This is the amount of money you’re requesting for the MCA.
- Average monthly credit card receipts: A 30-day average of daily credit card sales will determine the daily payment amount applied, based on the holdback percentage.
- Factor rate: This is the primary fee charged by the MCA provider and is a multiple of the advance amount. For example, if the advance amount is $10,000 and the factor rate is 1.25x, the total repayment would be $12,500.
- Other MCA fees: Other fees would appear here. Some MCA providers charge fixed-rate fees; others charge a percentage of the advance amount.
- Holdback percentage: The percentage of daily credit card receipts the MCA provider will collect daily to repay the advance. For example, if there are $5,000 in daily credit card sales, with a holdback percentage of 15%, the MCA provider will apply a $750 payment.
When To Use the Merchant Cash Advance Calculator
Before applying for a merchant cash advance, you should consult an MCA calculator to compare a merchant cash advance with other types of business financing. Not only does it provide an APR calculation, which can be directly compared to other types of financing, but it also shows the actual cost of the advance. The true costs might not be explicitly clear when applying for a merchant cash advance.
Other types of working capital loans will have lower APRs and better terms. Before applying for any small business loan, check out our guide for getting a small business loan.
What’s Not Included in the Merchant Cash Advance Calculator
The MCA calculator doesn’t account for fluctuating monthly credit card sales. If sales vary greatly month-to-month, the calculator might not provide an accurate repayment timeline for the advance. If the repayment period lengthens, this can also affect the APR calculation.
Bottom Line
A merchant cash advance is an expensive form of business credit. It’s a cash advance provided in exchange for a fixed percentage of daily credit card receipts. Businesses should exhaust all other options for business financing before considering an MCA. However, if you decide that an MCA is the only option for your business, check out National Funding and its merchant cash advance product.
