Financing
September 30, 2021

Understanding merchant cash advance factor rates

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If you’ve ever researched traditional loans, you’ve likely come across a much faster alternative: merchant cash advances.

Merchant cash advances (MCAs) are a lump sum of money given to a business. They're typically used for small, quick payments that can be repaid in a short amount of time. Unlike a bank loan, which charges an interest rate, MCAs are repaid using a percentage of your sales. 

There are a plethora of reasons that online companies prefer merchant cash advances over a loan. Let’s explore the benefits of an MCA.

Cost

Instead of paying a fee or percentage tacked onto an amount that you've borrowed, you pay a pre-agreed-upon percentage of your businesses sales each day. This saves founders money because you're not taking a large lump-sum loan and then being charged daily interest fees along with other administration fees. With MCAs, businesses pay for what they need and are charged from the lending platform— for instance, through a credit card or business account—depending on how the lender distributes payments.

Data-driven investing

MCA funding is given as an investment, rather than as debt. Securing funding from an alternative lender is determined by a number of factors that remove the bias from investing. For instance, merchant cash advance lenders look at factors such as your industry, the amount of time you've been in business, and your projected profits, among other things. This contrasts with traditional lending forms that hinge on your personal connections, your credit history, or what you can offer as collateral. With MCAs, your business can be as young as six months old, and already turning a profit. A new company will find it difficult to go to a bank and ask for a business loan due to their lack of credit history. When data is looked at as a deciding factor for funding, your options are virtually limitless.

Low risk to business owners

MCAs don't require any equity or personal guarantees. Instead, you get to maintain ownership of your company and don't have to promise assets as collateral: the MCA provider takes the risk. Much different from a loan, which charges you based on the interest rate, MCAs have a factor rate applied to them instead. Understandably, it's not quite as simple as taking a calculator and figuring out a percentage of your loan.
Let's take a closer look at factor rates. 

What is an MCA factor rate?

Factor rates are specific to advances in business funding. They are an amount multiplied by your initial loan amount. Typically they range between 1.1 and 1.5. depending on your lender agreement.

According to Lendio: