A merchant cash advance offer with a 1.30 factor does not carry a 30% annual percentage rate. The factor multiplies the stated advance amount to determine the purchased amount of receipts. It does not tell you how quickly collections occur, what fees are withheld, or how much cash reaches your business. Those missing details can change the decision even when two offers show the same factor.
Start with four separate measures: total dollars collected, usable cash at funding, collections on actual dates, and an annualized comparison calculated from those cash flows. Keep each measure labeled. A lower dollar cost can still create an unaffordable weekly debit; a longer collection period can lower an annualized figure without reducing the total dollars collected.
Factor rate, dollar cost, and APR answer different questions
For an illustrative $20,000 advance at 1.30, the purchased amount is $26,000: $20,000 × 1.30. The $6,000 difference is 30% of the stated advance before any additional fees. That is a whole-transaction cost ratio, not an annual rate. An MCA is commonly structured as a purchase of future receipts; the agreement and applicable law determine its treatment. Do not assume that a product name settles that question.
APR incorporates timing and financing charges under a defined calculation method. The CFPB consumer-loan explainer linked below describes the basic distinction between interest and APR; it does not establish which disclosure rules cover your commercial agreement. Ask the provider for the disclosures applicable to your transaction and the assumptions behind any estimated annualized rate.
Work from net proceeds, not the headline advance
| Measure | Calculation | Result |
|---|---|---|
| Stated advance | Amount used for the factor | $20,000 |
| Purchased receipts | $20,000 × 1.30 | $26,000 |
| Withheld funding fee | Deducted before deposit | $1,000 |
| Net proceeds received | $20,000 − $1,000 | $19,000 |
| Dollar financing cost | $26,000 − $19,000 | $7,000 |
| Cost as a share of net proceeds | $7,000 ÷ $19,000 | 36.84% for the transaction |
If another $8,000 goes directly to an existing holder, fresh operating cash falls to $11,000. Keep that payoff separate from fees: retiring an old obligation is a use of proceeds, not automatically a new financing charge. Record the old payment eliminated and the new payment added. Otherwise, a refinance can look like $20,000 of new liquidity when it delivers far less.
The collection schedule changes the comparison
| Collection count | Weekly collection | Total collected |
|---|---|---|
| 13 weeks | $2,000 | $26,000 |
| 26 weeks | $1,000 | $26,000 |
| 52 weeks | $500 | $26,000 |
The total dollar cost stays $7,000 in all three scenarios, but the business gives up cash much faster in the first. For daily collections, list the actual scheduled debit days and holiday handling; do not mix calendar days, business days, and monthly averages. For receipts-based collections, build a sales forecast and apply the contract percentage and any reconciliation provisions. A forecast is not a guaranteed payoff date.
Calculate a dated cash-flow estimate you can reproduce
For the 26-week scenario, assume funding on October 21, 2026, followed by exactly 26 payments of $1,000 every seven calendar days, beginning October 28. In a spreadsheet, put the funding date in A2 and positive 19000 in B2. Put the first collection date in A3 and negative -1000 in B3. Continue through row 28, adding seven days per row and keeping each collection negative.
The annual effective figure compounds the periodic cash-flow rate; it does not mean that $19,000 turns into an additional year of required payments. The assumed contract still collects $26,000 over 26 weeks. Do not compare XIRR directly with a quoted nominal APR as if the conventions were identical. Request the same method, fee treatment, and timing assumptions for both offers. Simply dividing the cost by the term and doubling it cannot reliably reproduce either measure.
Check early payoff in dollars before refinancing
Do not assume that paying sooner removes a proportionate part of the purchased amount. Read the early-payoff provisions and obtain a dated written quote. After ten $1,000 collections in the example, $16,000 of scheduled collections remain. A hypothetical $15,200 payoff would save $800 against those remaining collections. It would not refund a calculated share of the original $7,000 cost.
If replacement financing adds $2,000 of new cost solely to retire that balance, the $800 discount alone does not justify it: the combined future outflow would be $17,200 instead of $16,000, before other charges. Payment relief may still have value, but identify its price and test the new schedule. Compare incremental cash flows from today; do not treat an old balance as if it were fresh cash received today.
Test affordability separately from the rate
Suppose weekly cash available after operating expenses and existing obligations is $1,400. A new $1,000 collection leaves $400. If a slower week reduces that available cash to $700, the same collection creates a $300 shortfall. Use actual collection timing and a slower-sales case, not gross deposits alone. A smaller annualized number does not repair a negative cash balance on debit day.
Get these items before accepting an offer
- Gross advance, every withheld charge, payments to existing holders, and net cash deposited.
- Total purchased amount, collection frequency, first debit date, and estimated completion date.
- Receipts percentage, adjustment request process, and documents needed for reconciliation.
- Written early-payoff terms, quote expiration, and any remaining or additional charges.
- Applicable disclosures, annualized calculation assumptions, guarantees, and collateral terms.
Factor rate and APR questions
Is a 1.30 factor rate the same as 30% APR?
No. It means a purchased amount equal to 1.30 times the stated advance. Before fees, the difference is 30% of that advance for the whole transaction. Annualized cost also depends on proceeds received and the timing of collections.
Can I convert a factor rate to APR without a payment schedule?
You cannot calculate a reliable annualized comparison from the factor alone. You need net proceeds, dates, amounts collected, and fee treatment. For variable receipts, any forward-looking result depends on sales assumptions; request the provider disclosure and its method.
Does paying an MCA early always save money?
No automatic savings should be assumed. The agreement and a dated payoff quote establish whether a discount applies. Compare the actual discount with replacement financing costs and any charges before deciding.
Which matters more: APR or the weekly payment?
Both answer useful questions. An annualized measure helps compare cost under consistent assumptions; the payment schedule shows whether your cash balance can support collections. Also compare total dollar cost and usable proceeds. No single number establishes affordability.
Sources and authorities
Always confirm current authority and the rules of the applicable jurisdiction.
- Small-business financing: factor rates, payments, and reconciliation risks — Federal Trade Commission
- Financing disclosures: funding amounts, fees, and guarantees — Federal Trade Commission
- Loan interest rate and APR: a consumer-credit explanation — Consumer Financial Protection Bureau
- XIRR: dated cash flows and the 365-day calculation — Microsoft Support
Qualified Commercial Underwriting Desk
Credit and capital markets
The Qualified Commercial underwriting desk reviews commercial real estate, dealer and Main Street files daily. The Academy is written from that work (how files are actually read, priced and declined) rather than from a rate sheet.
Educational content only. Nothing here is a commitment to lend, an offer of credit, or tax, legal or accounting advice. Program terms, timelines and thresholds vary by lender, file and market conditions, and any figures shown are illustrative.