What does a merchant cash advance actually cost?
A factor rate is not an interest rate. Here is the arithmetic in one table, why paying it off faster costs more, and how to tell whether the price is worth it.
Ask a funder what an advance costs and you get one number back. One point three five. It sounds like a rate. It is not, and reading it as one is how business owners underestimate the cost.
None of this is an argument against taking an advance. It is how to work out the real number in about two minutes, using your own figures.
A factor rate is not an interest rate
Interest charges you for the balance you still owe. A factor rate multiplies the whole amount once, at the start.
They give you the total repayment in dollars without being asked.
The quote shows 1.35 and no dollar figure anywhere on the page.
The arithmetic, worked through
A business doing 100,000 dollars a month in deposits takes 50,000 at a 1.35 factor, with 15 percent of daily deposits held back.
A worked illustration, not an offer or a market average. Your factor rate, holdback and deposit volume change every line. The annualised figure uses the average balance outstanding across the term.
Paying it off faster costs more
The dollar cost is locked. Only the calendar moves. Clear it in three months instead of six and you paid the same money for half the time.
| Time to clear | Total repaid | Cost of the money | Approximate APR |
|---|---|---|---|
| 3 months | $67,500 | $17,500 | ~280% |
| 4.5 months | $67,500 | $17,500 | ~185% |
| 6 months | $67,500 | $17,500 | ~140% |
| 9 months | $67,500 | $17,500 | ~93% |
| 12 months | $67,500 | $17,500 | ~70% |
A strong sales month is good for your business and expensive on an advance.
When the cost is worth paying
A price means nothing on its own. It means something next to what the money earns while you hold it.
- What will this money earn before it is repaid?Put a dollar figure on it. If you cannot, that is your answer.
- Could I get it cheaper in the time I actually have?Money that arrives in sixty days is not cheaper if the opportunity closes in ten.
- What does doing nothing cost?A contract turned down or stock not bought carries a price too.
Cheap money you cannot get is worth nothing. Expensive money that lands a contract can be the best deal you do all year.
Why the cost surprises people
The Federal Reserve asks thousands of US employer firms about this every year. The 2025 survey is blunt about it.
Federal Reserve Banks, 2026 Report on Employer Firms, from the 2025 Small Business Credit Survey.
Five questions before you sign
A funder running a clean book answers all five without hesitating.
- What is the total dollar amount I repay?One number, in dollars.
- Is the holdback a percentage or a fixed daily debit?A fixed debit does not flex when sales dip, which is when it hurts.
- What is the estimated APR?Required in some states, available on request everywhere.
- What changes if I repay early?On most advances, nothing. Get it in writing either way.
- Is there a confession of judgment, personal guarantee or UCC filing?These decide what happens on your worst month.
Price is a term. Conduct is not
A high factor rate is a commercial term you can weigh and decline. How a funder behaves after signing is not. The FTC has acted against funders on conduct rather than price, returning more than 9.7 million dollars to small businesses in one case and permanently banning a firm and its owner in another.
Those are a small number of firms in a large market. But they tell you which three clauses to read first.
The contract spells out the debit authority, default terms and guarantee, and they walk you through all three.
You are asked to sign before seeing the full contract, or the verbal terms are not the written ones.
Where an APR is now required
More than ten states have passed commercial financing disclosure laws. Which applies usually turns on where your business is managed, not where the funder sits.
| State | What it requires |
|---|---|
| California | Disclosure including an APR. A 2025 amendment restricts calling non-annualised pricing an interest rate |
| New York | Amount financed, finance charge, APR or estimated APR, total repayment, payment size and prepayment terms |
| Virginia | Sales-based financing disclosure, plus provider registration |
| Texas | Sales-based financing disclosure under HB 700, effective 2025 |
| Utah, Connecticut, Florida, Georgia, Kansas, Missouri | Disclosure or registration that varies by state, not all mandating an APR |
General information, not financial or legal advice. Worked figures are illustrations chosen to show the method, not quotes, offers or market averages, and annualised figures are approximations based on the average balance outstanding across the term. Pricing, state disclosure rules and availability vary by state, funder and business. Cashman Sam is not a bank, a lender or a broker of record, and is compensated by funding partners when a deal completes. Review your own contract and take professional advice before signing.
Sources
- Federal Reserve Banks, 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey
- Federal Trade Commission: FTC returns more than $9.7 million to small businesses harmed by Yellowstone Capital's merchant cash advance operation
- Federal Trade Commission: FTC action results in ban for Richmond Capital and owner from the merchant cash advance and debt collection industries
- Venable LLP: State commercial financing disclosure laws, recent developments and compliance considerations
