A Merchant Cash Advance Loan: we did the math

Estimated reading time: 12 minutes

Nowadays, there are many sources of capital available to small business owners in the United States. A recent  report published by the Pepperdine University’s 2019 Private Capital Markets Report documented a small business owners willingness to obtain financing, the top 10 choices are as follows, from most likely.

  1. Bank loan
  2. Grants (SBIR, STTR, etc.)
  3. Credit card – business
  4. Trade credit
  5. Equipment leasing
  6. CDFI/Credit union loan
  7. Asset based lender
  8. Private equity
  9. Angel investor
  10. Venture capital

Other less commonly contacted sources included personal loans, friends and family, accounts receivable factoring firms (like us), and a merchant cash advance.

Of the small business owners asked, nearly one in four did not ask for capital for their business in the past year. The varied reasons are quite interesting. According to the data, some businesses generated enough cash flow internally to fund their current operation, but a significant number had more practical and ominous reasons for not trying to obtain capital for their business, including;

  1. My business would be rejected, 18%
  2. I do not have the knowledge and or expertise to pursue external funding, 6%
  3. I do not have the time to pursue external financing, 6%
  4. I would lose control and flexibility if I did, 6%
  5. The economy is bad and I don’t have sufficient demand for my product or service, 8%

Added together, these reasons for not trying to obtain capital total over 40% of all of the reasons cited by business owners.

The MCA Industry Recap

Perhaps, it is these reasons that a new (and unfortunate) industry has grown exponentially in the US small business loan market. The merchant cash advance (MCA) has exploded in size and is a trend that merits an open discussion. This is the reason for the article.

First, what is an MCA?

The MCA was a loan made primarily to businesses with significant credit card sales. In this process, the MCA would make an advance against future credit card sales. The original industries that took out an MCA were commonly in the restaurant, bar, and automotive sectors. Now, MCAs have grown and used by nearly every type of small business.

There are several facts about MCAs that a small business owner must be aware to understand the risks and costs related to an advance of this type.

  1. According to marketing materials published by MCAs themselves, the estimated MCA has an effective average APR of over 100%.
  2. Most do not require a minimum credit score and you can get the money quickly – 24 to 48 hours and you’ll have all the cash you need! is a common phrase in these emails.
  3. The minimum amount they will advance is low at $5,000.
  4. MCAs may allow you to get a second or third loan – even if you already have an outstanding MCA in place.
  5. Loans initially start at a short period of time (3 to 6 months), but few are paid back by the deadline.
  6. In addition to the high APR, nearly every small business owner that took out an MCA paid extra fees such as an application fee or origination fee while one in two small business owners paid additional fees for a UCC search, account set up, according to the Pepperdine Survey mentioned above.

The bottom line on MCAs… in order to provide you with quick and easy cash, your business needs to enter a legal agreement in which you will pay 100% to 200% in interest a year. And in the event that you are able to pay them off before the loan is due, you have to pay them the total amount agreed upon. If you do not, they may have a contractual right to come after your business and demand payment in full or pull up roadblocks to prevent your business from getting approved for less expensive forms of capital.


Any assessment of the MCA model leads to a simple question: why would any business ever do this? Why would a business burden themselves by taking out a loan with a stated APR of 100% a year?

The business owners surveyed in the report mentioned above were candid about why they burdened their own businesses with such a financial albatross. The most common use of the cash proceeds from an MCA were:

  1. To finance worsening operations [in other words, prop up a bad situation and make it worse with a very expensive loan],
  2. To finance fluctuations in working capital ,
  3. And to use for a specific project or to expand.

My own thoughts are more blunt: uneducated business owners don’t do their homework when they’re in a financial crunch.  

As a result, it is not a surprise that the expected loss by the lender is sky high, according to the Pepperdine Study. The median expected loss by the lender is 7.5% of the new MCA loaned. A typical loan loss in a bank averages less than 1% as a comparison, but when the MCA makes 100% interest; I guess a 7% loss percentage is acceptable.

As you will see below, one of the more visible firms in the small business loan sectors actually charge offs are more than twice this 7.5% rate; and I believe the self-quoted data from the MCA industry noted above is understated.

But even more disturbing is the way they are marketed and the lack of accurate and transparent data on what the true costs and APR are. This makes a bad decision even worse, let’s explain why.

Why APR is so important

If you have any type of loan (including a car loan, mortgage or credit card), the lender is required to provide the total cost in writing. As you may be aware, the Truth in Lending Act or TILA is a Federal law passed in 1968 that insures consumers have accurate data about the true cost of a loan so they can make an educated decision.

A key part of TILA is to disclose the amount of your loan, the Annual Percentage Rate “APR”, other charges you may encounter (such as an application fee, late fee, prepayment fee), and the total dollar amount you will pay over the life of the loan.

So when you are shopping around for a loan for your small business, do not get fixated with the lowest monthly payment or even the cheapest rate you are quoted. What you need to know is the true annual percentage rate (APR). This is because an APR calculation has to include all of the costs related to the loan, as I mentioned earlier, this will include interest and other fees.

What is the true APR on an MCA?

The MCA industry has chosen to evade the answer to this question by not providing a simple, transparent answer. Instead, they quote their advances using terms like “buy rate”, “factor rate” or “advance rates.” These terms mean nothing when compared to a true APR calculation. In fact, they really mean nothing.

Again, let’s see why. Here is a recap or how an MCA really works:

  • An MCA is a product where a small business gets capital as an advance, giving up a percentage of their daily credit card receipts, or by giving the MCA access to their bank accounts to withdraw a payment usually daily. I have seen these “buy” or “factor” rates run from 1.2 to 1.5 the amount the MCA agrees to advance.
  • Once approved, the MCA will provide the small business an agreed upon amount of money. The MCA then immediately collects their payments from the business daily.

So how can I calculate true APR?

The answer: you can’t – and you won’t hear that from the MCA. This is because the true cost of the MCA depends on how long you take to repay them and the factor rate. The factor rate is the multiplier of the amount  advanced that you committed to pay. The unfortunate fact is that the amount you agreed to pay is the same regardless of how quickly you make payments.

Why does this matter? Let’s use an example so you can see why this is bad news for those who use an MCA.

  • An average factor rate for an MCA is 1.3X.
    • This means again for every $1 the MCA just sent you, you have to pay them back 1.3 times that amount. So let’s assume you took out an MCA today for a small amount, thinking that you would pay them back quickly once your financial situation improves or the crisis passes.
  • The amount you are advanced is $50,000.
  • You will as a result, owe the MCA 1.3 times $50,000 or $65,000 in total, regardless of how long it takes for you to pay them back.

Due to the MCAs structure to extract maximum return from you, the only thing fixed in stone is the total payback amount. This is unlike an interest rate a bank or other lender would charge you. With an interest rate loan, interest will accrue over time and if you repay the loan early, you will pay less over the life of the loan. With an MCA, they don’t care when you pay them and repaying them early technically increases your true cost.

As seen in our example above, you can only know the true APR if you know exactly how long it will take to repay them. I will show you how to do this…

  • Advanced amount; $50,000
  • Factor rate; 1.3 times
  • Total owed; $50,000 times 1.3 = $65,000

If you pay the MCA in 90 days; $15,000 in interest for 90 days = an APR of 229%. That is not a typo. You have paid the MCA $16.027.39 over 90 days. Multiply this by 4.05 to get an annualized APR. 4.05 times the $16,027.39 equals $64,910.92 or nearly equal to the $65,000 you agreed to pay in full.

  • If you pay the MCA off in 6 months, the true APR is 114%.
  • If you pay the MCA off in 9 months, the true APR is 76%.
  • If you pay the MCA off in 12 months, the true APR is still a staggering 57%.

This assumes a factor rate of 1.3 times. For a more common factor rate of 1.4, the true APR is even higher;

  • 298% for 3 months
  • 148% for 6 months
  • 99% for 9 month
  • and 74% for one year!

Keep in mind, some MCAs charge other fees on top of these sky high APRs, these can include an early termination fees, filing fees and the like.

Similar Small Loan Products

There are also many other variations in the marketplace that offer a low APR to a small business owner seeking quick capital, but after close scrutiny, many are expensive and may undermine the financial viability of a small business owner who won’t take the time to crunch the numbers.

Many of the providers of these tailored products for small business are not a good deal. I researched several well-marketed products and here are the facts of the true APR on some of their small business loans below.

On Deck is one of the better known of these small business online lenders and they actually are quite forthright about the true APR of their small business loans. As a publicly traded company, they are required to submit periodic reports and this is taken directly from their most recent 10Q report, dated August 7, 2019. You can easily find their entire filings online or on their own website.

Like the MCA’s mentioned above and as noted in this 10Q, On Deck also quotes their pricing in different terms and don’t include APR on their term loans for small businesses. Instead they use a term “cents on the dollar” or COD. For their lines of credit, they are more transparent, using APR. See this note from page 33 of the most recent 10Q.


Customer pricing is determined primarily based on credit risk assessment generated by our proprietary data and analytics engine and cash flow assessments of the customer’s ability to repay the loan. Our decision structure also considers the OnDeck Score, FICO Score, loan type (term loan or line of credit), term loan duration, customer type (new or repeat) and origination channel. OnDeck assesses credit risk across several dimensions, including assessing the stability and credit worthiness of both the business and the personal guarantor and of the borrower’s industry. Some of the most important factors assessed relate to the borrower’s ability to pay, overall levels of indebtedness, cash flow and business outlook, and their personal and commercial credit history. These factors are assessed against certain minimum requirements in our underwriting standards, as well as through multivariate regressions and statistical models. In addition, general  market  conditions  may  broadly  influence  pricing  industry-wide.  Loans  originated  through  the  direct  and  strategic  partner  channels  are  generally  priced  lower  than  loans  originated through the funding advisor channel due to the commission structure of the FAP program as well as the relative higher risk profile of the borrowers in the FAP channel.

As of the three months ended June 30, 2019 , our customers pay between 0.005 and 0.043 cents per month in interest for every dollar they borrow under one of our term loans. Historically, our term loans have been primarily quoted in Cents on Dollar, or COD, which reflects the monthly interest paid by a customer to us per dollar borrowed for a loan. Lines of credit have been historically quoted in APR. As of the three months ended June 30, 2019 , the APRs of our term loans outstanding ranged from 12.7% to 99.4% and the APRs of our lines of credit outstanding ranged from 19.9% to 61.9% .”

Source, page 33

And as documented in their own filings, the average APR for all of their term loans and line of credit is nearly 50% a year, or 45.4%! This is average. The same note reveals the highest APR for their terms loans is 99.4% and for their lines of credit 61.9%.


Source, page 34

What is even more interesting is how high their actual charge off % are, even after using what they describe as multiple analytical tools, proprietary scoring models, FICO, etc. Nearly one in every six loans in their portfolio as of June 2019 are charged off. The actual percentage as documented in their 10Q is 15.1%. The bigger question is what happens if /when an economic downturn occurs and more and more business paying these very high interest costs simply can’t afford to pay their On Deck loan and or line of credit on time.


Source, page 36

There are similar online lending platforms that offer lines and loans of credit to small businesses today. Published research documents that the true APR are usually 40% to 70%, regardless of how they quote the cost by using terms like COD, percentage of each dollar, etc.. This is something that any small business owner seeking capital must carefully take into account before getting stuck with a loan they can’t afford.

Summary and Conclusion

Like a sheep in wolves clothing, the MCA product is a troubling and rapidly growing segment of the small business online lending industry today. A small business owner must be very careful and understand the true cost APR of this kind of capital. If they don’t, they run the risk of true financial Armageddon, and a wise small business owner should seek all other reputable options for capital before selecting to get a seemingly low cost, fast MCA for their small business enterprise.