Merchant Cash Advance
vs. term loan, in plain math.

What Is a Factor Rate, Really

A merchant cash advance isn't legally a loan. The funder buys a slice of your future receivables at a discount. You receive, say, $50,000 today; you owe $70,000 (a 1.4 factor) repaid via daily debits over 8–10 months. The factor isn't an interest rate — it's the total markup. The APR depends entirely on how fast you pay it back.

Convert a Factor Rate to APR

The standard approximation:

APR ≈ (Factor − 1) × (365 / Days to repay) × 100

For a 1.4 factor over 270 days (9 months):

(1.4 − 1) × (365 / 270) × 100 = 0.40 × 1.352 × 100 = ~54%

But that's the simple-interest APR. The true APR (effective, compounded the way a bank would quote it) is closer to 78% because you're not getting the use of the full $50,000 the whole time — daily debits start the day you get the money and reduce the average balance you actually have.

Run the exact math through the factoring & MCA calculator — it computes both the factor-to-APR conversion and the effective rate using a Newton-Raphson solver.

MCA vs. Term Loan: Side-by-Side

Need: $50,000 working capital. Two offers:

• MCA: 1.4 factor, ~9-month payback, daily debit of $290.
• Term loan: 24 months at 18% APR with 5% origination fee. Monthly payment ~$2,500. Effective APR ~22.5%.

Total cost of capital:

• MCA: $20,000 in 9 months → ~78% effective APR
• Term loan: $10,300 in 24 months → ~22.5% effective APR

The term loan is more than three times cheaper in dollars and a third the rate. But it requires reasonable credit (FICO ≥ 660), at least 2 years in business, and bank-grade financials.

When an MCA Actually Makes Sense

Three legitimate use cases:

1. Bridge to a clearly identified bigger receivable. If you have a $100k contract closing in 60 days and you need $30k to make payroll until then, an MCA at 1.15 over 60 days is roughly a 90% APR — but you only pay it for 60 days. Total cost: $4,500. Acceptable in extremis.
2. Inventory turn for a high-margin SKU. If you can buy $50k of inventory and resell it at 60% gross margin within 60 days, a 1.4 factor over 9 months still leaves you ahead — but only if the turn is real, not theoretical.
3. You've been declined everywhere else and you're not just deferring death. If the underlying business is profitable and the cash crunch is genuinely temporary, an expensive MCA can save the company. If the business is unprofitable, an MCA accelerates the failure.

The Stacking Trap

Stacking means taking a second MCA while the first is still active. Funder #2 lends, knowing they're junior. Now your daily debits are $580 instead of $290, and you have less than half the daily cash flow available for inventory and payroll. Funder #3 shows up. Stacking is how a single MCA becomes a death spiral.

Most MCA contracts technically prohibit stacking; in practice it happens constantly because brokers chase commissions. Do not stack. If you can't service the first MCA, restructure with the original funder before taking a second.

How to Escape an MCA

1. Renegotiate. A funder would rather restructure than write you off. Ask for an extended term at a higher factor (lower daily debit, slower payback).
2. SBA refinance. Some SBA 7(a) loans can refinance high-cost debt. The bar is high but the math is transformative — 22% effective APR vs. 78%.
3. Term loan from a real bank. If the business has stabilized since the MCA was taken, your bank or a SBA-preferred lender may consolidate the MCA into a 24–60 month term loan.
4. Last resort: Subchapter V or chapter 11. Not failure — a controlled reorganization that can void or reprice the MCA. Talk to a small-business bankruptcy attorney before it's too late.

The Decision Framework

Before signing any MCA:

1. Compute the effective APR with the factoring & MCA calculator.
2. Compare it to a term-loan offer from the term-loan calculator or an SBA 7(a) via the SBA calculator.
3. If the term loan exists and is approvable, take it. Always.
4. If only the MCA exists, ask: do I have a specific, dated receivable that pays this off? If yes, proceed cautiously. If no, the MCA is probably accelerating a failure rather than preventing one.

Sources

FTC v. RCG Advances complaint and consent order (2023); SBA 7(a) program guide; Federal Reserve Small Business Credit Survey 2024.