Merchant cash advances (MCAs) can give your business a quick, easy, and flexible way to get money for various pro-business purposes. You can get a lump sum of money upfront without enduring mounds of paperwork and days of waiting through traditional bank approval stages.
Also, instead of assuming bank loan fixed payments and interest, you get the lump sum in trade for a percentage of your future credit card sales. This financing arrangement is why the factor rate is essential in determining the cost and terms of your merchant cash advance. We will help you fully understand the MCA factor rate by explaining what it is, how it differs from interest rate and APR, and how we calculate it.
What is a Merchant Cash Advance Factor Rate?
A factor rate is a unit of measure that provides a straightforward way to calculate and express the total repayment amount of your MCA. Since it helps clearly define the cost of this alternative financing arrangement, there is no need to include an annual percentage rate (APR) used by traditional banks.
A factor rate quote typically appears as a decimal figure ranging from 1.2 to 1.5 or higher. This figure (multiplier) is essential for calculating your total repayment amount for the advance. In addition, it helps promote transparency and simplicity in the MCA process.
Merchant Cash Advance Factor Rate vs. Interest and APR?
The MCA factor rate, interest rate, and annual percentage rate (APR) share a common purpose in calculating the total cost of receiving funds through financing. However, they differ significantly in several ways.
Calculation
The merchant cash advance factor rate calculation is a one-time process that occurs during the underwriting process. It applies to the original cash advance only. Also, you can easily calculate your total repayment amount by multiplying the actual cash advance by the MCA factor rate.
On the other hand, the interest rate represents a percentage of the loan balance due per period. And it requires an annual recalculation. Traditional lenders calculate the total amount due by using the amount you owe times the interest rate, any compounding interest, and the length of time on the loan. The accuracy of the calculation depends on you sticking to a strict payment schedule with a fixed repayment amount.
The APR is a more inclusive measure that includes all the factors in the interest rate calculation and any associated fees or costs. It gives you a broader view of the total cost of borrowing through a traditional loan. The APR is also expressed as a percentage and follows the same rules as an interest rate.
Application
Traditional lending institutions do not use the MCA factor rate. Instead, it is a primary measure in MCA financing. Interest rates and APRs are standard measures for calculating traditional loans, such as personal loans, mortgages, and credit cards.
Cost Shopping
If you are shopping to get a lump sum of money for your business, the merchant cash factor rate provides a transparent and direct way to determine your total repayment amount for an MCA within a few minutes. As such, you’ll have an easier time getting the best merchant cash advance deal. Shopping for interest and APR-based loans requires more of your time to get a clear answer for the same information.
How Do Financiers Calculate the Merchant Cash Advance Factor Rate?
MCA financiers use a simple formula to calculate the merchant cash advance factor rate. They divide the total repayment amount by the initial cash advance amount. The result of this division is your factor rate. For example, suppose you receive a $20,000 MCA, and the total repayment amount is $26,000. You would divide $26,000 by $20,000 to arrive at a factor rate of 1.3. This result means you would repay $1.30 for every dollar you received in advance.
Although you will get your actual terms during the underwriting process, you can use the Zinch Merchant Cash Advance Calculator to estimate your MCA cost before starting the application process. The merchant cash advance calculator is an excellent tool for testing different factor rates according to your estimated monthly credit card sales and desired MCA term (months).
Using the Merchant Cash Advance Factor Rate
The MCA cash advance factor rate is a primary aid in making a merchant cash advance an uncomplicated, quick, and flexible source of financing when your business needs a lump sum of money to progress. Now that you understand how it works, shopping for a MCA should be even easier. Contact us at (714) 500-6622 to explore your options. You could qualify for up to $250,000 in just 24 hours.
