Factor rates and payback math, worked through

Step 1: the payback

Everything starts with two numbers: the advance amount and the factor rate. Their product is the payback, or RTR, the total the merchant will remit.

Running example: a landscaping company with $70,000 a month in true revenue takes a $40,000 advance at a 1.30 factor, with a 3% origination fee, paid daily over about eight months.

payback          = advance x factor     = $40,000 x 1.30   = $52,000
cost of capital  = payback - advance    = $52,000 - $40,000 = $12,000

A 1.30 factor means 30 cents of cost on every dollar advanced, however long repayment takes.

On a fixed ACH deal, the funder divides the payback by the number of payments it expects. Daily means business days, conventionally 21 a month (some funders use 20 or 22). Weekly means about 52/12, or 4.33, a month.

payments (daily)  = 8 months x 21          = 168
daily payment     = $52,000 / 168           = $309.52
weekly option     = $52,000 / 35 payments   = $1,485.71

Cents are rounded; the last payment absorbs the difference.

Now check what share of revenue that payment takes. Convert it to a monthly figure and divide by true revenue. This is the effective holdback.

monthly payment  = $309.52 x 21        = about $6,500
holdback %       = $6,500 / $70,000    = 9.3%
weekly option    = $1,485.71 x 52 / 12 = $6,438 a month, 9.2%

Check your own numbers with the holdback calculator. Funders cap combined holdback, often somewhere between 10% and 25% of revenue including existing advances, which the stacking lesson covers.

Step 3: percentage holdback and estimated term

On a split or true percentage deal there is no fixed payment. The funder takes an agreed percentage of each card settlement, so the term depends on sales. Suppose the same company takes a 12% split of its card sales, which run $45,000 a month.

monthly remittance = $45,000 x 12%        = $5,400
estimated term     = $52,000 / $5,400     = 9.6 months
if card sales drop to $36,000:
monthly remittance = $36,000 x 12%        = $4,320
estimated term     = $52,000 / $4,320     = 12.0 months

The payback never changes. A slower month stretches the term instead of raising the payment.

That is why the term on an MCA is always called estimated. It is also why the same factor rate can be cheap or expensive in annualized terms: the cost is fixed, but the time the merchant has the money is not.

Step 4: fees and the cash that actually arrives

origination fee   = $40,000 x 3%           = $1,200
net funding       = $40,000 - $1,200       = $38,800
true cost         = $52,000 - $38,800      = $13,200
factor on net     = $52,000 / $38,800      = 1.34

Two offers with the same factor and different fees are not the same price. Compare the factor on net funding.

Why APR comparisons are tricky, and increasingly required

A factor rate is not an interest rate. A 1.30 factor looks like 30%, but the merchant has the money for months, not a year, and pays it back from the first business day. The usual way to compare it with a loan is an effective APR estimate: find the annual rate at which the scheduled payments are worth exactly the cash received.

Estimates from the payment schedule against $38,800 net funding, 252 payment days a year.
Schedule	Payment	Effective APR estimate
168 daily payments (about 8 months)	$309.52	about 92%
252 daily payments (about 12 months)	$206.35	about 62%

Same advance, same factor, same fee: stretching the term from eight to twelve months cuts the annualized estimate by about a third. The catch is that a true MCA has no fixed term, so any APR depends on an assumed payment pattern. If sales fall and remittances slow, the real annualized cost falls too.

Even so, a growing number of states require the provider (the funder) to disclose an estimated annualized cost on covered deals, using a method set in their regulations, alongside total repayment and payment amounts. Brokers generally pass along the provider's disclosure unchanged rather than producing their own figure. The disclosure laws guide lists the states as of its date.

Try it

The MCA factor rate calculator shows payback, payment, cost and an APR estimate for any advance, factor, fee and term. Use it to learn the shape of the numbers, not as a disclosure.

How the CRM helps

The offer calculator on each deal runs every formula in this lesson as you type an offer: payback, net funding after fees and payoffs, number of payments, payment, term and holdback against the merchant's true revenue, for daily, weekly, biweekly, monthly or split schedules. Business days per month are set per lender, and each offer stores its inputs so the numbers reproduce later. It deliberately does not compute a disclosure APR.

Questions

How do you calculate the daily payment on a merchant cash advance?

Multiply the advance by the factor rate to get the payback, then divide by the expected number of business-day payments. A $40,000 advance at 1.30 is $52,000 of payback; over 168 business days (about eight months at 21 a month) the daily payment is about $309.52.

What is a good factor rate?

There is no single good number. Strong files with solid revenue and clean statements are often priced around 1.10 to 1.25, riskier files higher. Compare offers on payback, net funding and payment rather than the factor alone, because fees and term change the real cost.

Why is the APR on an MCA so high when the factor rate looks low?

The factor is a flat cost charged on the full advance, but the money is repaid daily or weekly over a few months. Annualizing that short, front-loaded schedule produces a much higher rate than the factor suggests, and shorter terms produce higher estimates.

Sources

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