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.


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:

“[Unlike interest rates ] factor rates are calculated up front and never change. Rather than make recurring payments as you would with a standard loan, you’ll pay the full amount up front.” 

Lendio suggests using MCAs as short-term financing. This is because factor rates are particularly inexpensive, especially in the following scenarios:

  • Unexpected costs 
  • Seasonal slow periods where you may want to advertise
  • Sudden inventory needs or stockouts
  • Equipment purchases or repair
  • New business opportunities

If you’re unsure of your factor rate, but have already accepted funding for your business, here’s how to figure out the factor rate you’re paying: 

equation for MCA factor rate

The original amount you borrowed is multiplied by your factor rate. So, the calculation should look like this:

Factor rate pros and cons


  • Quickly boost your cash flow
  • Easily access funds and use them immediately
  • A wide market of lending companies makes factor rates more competitive
  • Advances can be repaid quickly and save you the monthly fee with interest rates tacked on 
  • Applying doesn’t require a credit check 
  • MCAs can affect your credit score
  • You can’t access another advance from the same lender
  • Your full fees and charges can add up

How will a factor rate affect my overall advance?

Leveraging merchant cash advances that are repaid quickly can save you a lot of money in the long run.

They’re a great option for businesses who require funding up to $10M. Financing your business expenses using a factor rate vs. an interest rate is an excellent option for short-term investments like ad spend, financing inventory, etc. This allows your repayment amounts to stay low and the ability to access more funding when you need it.

Merchant cash advances through Clearco are flexible, and funding is easy to apply for and receive. You can be approved for funding in as little as 48 hours. 

Connect your business accounts to see how much you’re eligible for.

Thinking about taking equity-free funding for your business?

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