If you’re a small business owner exploring alternative financing, you’ve likely come across a merchant cash advance (MCA). One of the most important questions is how MCA repayments are calculated. This article dives into exactly that — the formulas, the variables, the pitfalls, and how you can evaluate your true cost.
When someone searches “how MCA repayments are calculated”, their intent is clearly informational. They want to understand how repayment is structured, what factors go into the cost, and how to compare offers. This article addresses that by giving detailed explanations, examples, and actionable steps.
An MCA is financing in which a business receives a lump-sum payment now and agrees to repay the advance by giving a portion of future credit-card or debit-card sales (or future revenue) to the funder until a predetermined total repayment amount is met.
Key features:
It’s not a traditional term loan with fixed monthly payments.
It uses a factor rate instead of a traditional interest rate (for many providers).
Repayment is often automatic and based on sales volume or a fixed debit percentage.
Because of this structure, the true cost and effective APR (annual percentage rate) can differ significantly compared to conventional loans.
Calculation matters because:
It affects cash flow — if the holdback or debit is too high, you may struggle on slow sales days.
It helps you compare financing options — a factor rate of 1.3 might sound fine until you see how long it takes you to repay.
It avoids unpleasant surprises — some MCAs carry high effective APRs even if the factor rate seems modest.
Before we dive into the formulas, here are important terms:
Advance Amount: The cash you receive up front.
Factor Rate: A multiplier (e.g., 1.2, 1.35) applied to the advance amount to derive the total repayment.
Total Repayment Amount: Advance × Factor Rate = what you owe in total.
Holdback Percentage (or Split): The percentage of your daily/weekly credit-card sales that is withheld to repay.
Effective APR: An annualized measure of the cost — helpful for comparing MCAs and traditional loans.
Repayment Term (duration): How long it takes to repay — variable for MCAs because it depends on your sales.
Let’s walk through calculating repayments in a logical order.
This is the cash you get upfront. Example: $50,000.
Suppose the factor rate is 1.25. This means you’ll owe $50,000 × 1.25 = $62,500 total repayment.
Total Repayment = Advance Amount × Factor Rate
Using our numbers: $50,000 × 1.25 = $62,500
If your business is required to remit 10% of daily credit-card sales until the $62,500 is paid, that’s your holdback.
If you know your average monthly card sales (say $100,000 in card sales) and your holdback is 10%, then:
Monthly remittance = $100,000 × 10% = $10,000
Hence you’d pay the $62,500 back in ~6.25 months.
Alternatively, some providers offer fixed daily ACH debits instead of percentage splits.
To compare to traditional loans, you can annualize the cost. For example:
Advance: $50,000
Fee paid: $62,500 – $50,000 = $12,500
Percentage cost: $12,500 / $50,000 = 0.25 (25%)
Suppose repayment occurs in 7 months (≈ 210 days)
Annualized: (0.25) × (365 / 210) ≈ 43.5% APR
Some MCAs include origination fees, monthly program/ACH fees, early-repayment penalties. Add these to truly assess cost.
Let’s go through a full example.
Advance amount: $30,000
Factor rate: 1.30 → Total repayment = $30,000 × 1.30 = $39,000
Holdback: 12% of daily credit-card sales
Suppose your average monthly card sales: $60,000
Monthly remittance: $60,000 × 12% = $7,200
Estimated repayment period: $39,000 ÷ $7,200 ≈ 5.4 months
Cost: Fee = $9,000 / $30,000 = 30%
Annualized: ≈ 30% × (365 ÷ (5.4×30)) ≈ 30% × (365 ÷ 162) ≈ 30% × 2.25 ≈ ~67.5% APR
The effective APR is quite high — compared to a traditional business loan it could be significantly more expensive.
Since repayment is often tied to a percentage of your card-sales, higher sales = faster repayment. Lower or erratic sales = longer term and likely higher effective APR.
The higher the factor rate (e.g., 1.4 vs. 1.2), the more you repay. The factor rate is influenced by risk — less established businesses, unpredictable revenue, high-risk industries will pay higher rates.
Whether a percentage of sales or fixed ACH debit changes pressure on cash flow and timing. Fixed ACH debits don’t adjust for slower sales — this can increase business stress.
Origination fees, monthly program fees, early-repayment penalties all add to cost and complicate calculation.
Because MCAs lack fixed term length (unless specified), time to repay matters. Faster repayment reduces duration risk but may increase cash‐flow strain; slower repayment could reduce monthly pressure but ultimately cost more in effective APR.
Many providers offer online calculators for MCAs. Useful steps:
Input your expected advance amount.
Input factor rate offered.
Input your average monthly card sales (or daily).
Input your holdback percentage.
Observe: total repayment, estimated repayment duration, and maybe estimated APR. Swoop UK
By using this tool you can test different scenarios and see how your sales impact repayment.
| Feature | MCA | Traditional Term Loan |
|---|---|---|
| Repayment structure | Based on sales % or daily/weekly deduction | Fixed monthly payments |
| Cost model | Factor rate, may lack APR disclosure | Interest rate + APR disclosed |
| Term length | Variable until total paid | Fixed term (e.g., 3-5 years) |
| Cash flow impact | Payments vary with sales (good if sales high) | Fixed payments — predictable |
| Cost (APR) | Often high effective APR | Generally lower APR if credit good |
Because of these differences, calculating repayments accurately is critical to ensure you’re making a sound choice.
A factor rate is a multiplier applied to the advance amount to arrive at total repayment. For example, a factor rate of 1.3 means you’ll repay 1.3 × your advance.
By contrast, interest rate applies to outstanding balance over time and is typically expressed as an annual percentage.
You estimate it by dividing total repayment by your projected monthly (or daily) remittance:
Estimated Term = Total Repayment ÷ (Monthly Sales × Holdback %)
Keep in mind: slower sales stretch the term.
Not always — it depends on your business situation. If you have strong, high-volume, consistent card sales and need speed/flexibility, an MCA may make sense. But you should check the effective APR and compare with term-loan options.
Some providers allow early repayment (sometimes with a discount), but others may have no early payoff benefit or even penalties. Always ask.
If repayment is percentage-based on sales, lower sales mean lower payments — but that stretches the term and can increase the effective cost. If payments are fixed ACH debits, low sales can strain cash flow. Evaluate your risk.
Here are actionable steps to protect your business:
Run multiple scenarios — what if your sales drop 20%? Estimate repayment under each scenario.
Ask for a payment chart — see what your repayment looks like month by month under estimated sales.
Compare effective APRs — convert the cost into an APR so you can compare with other financing.
Understand all fees — origination, monthly, ACH, early payoff.
Negotiate holdback percentage or factor rate if possible — improving those has big impact.
Test cash-flow impact — make sure the daily/weekly holdback won’t starve your business of working capital.
Consider alternatives — if you have access to a lower-cost business loan, line of credit, or equipment financing, compare side by side.
While MCAs tend to cost more, there are situations where they can make sense:
You need fast access to capital and don’t qualify for a bank loan.
Your business has strong, consistent card sales.
You understand the cost and can absorb the holdback effect on cash flow.
You use the funds for short-term, high-return investment (e.g., quick inventory turnover) that will cover the cost.
You accept that you’ll repay early and finish in 3-6 months.
In these cases, the flexibility and speed may outweigh higher cost.
Avoid an MCA if:
Your card-sales are unpredictable, or you’re in a seasonal downturn.
You can qualify for a lower-cost business loan or line of credit.
Your business cannot handle a significant daily/weekly remittance without hurting operations.
The factor rate or holdback will leave you with too little cash flow after repayment starts.
In summary, understanding how MCA repayments are calculated is vital for making informed financing decisions. Key take-aways:
The advance amount × factor rate = total repayment.
Repayments often come from a percentage of daily/weekly sales (holdback) or fixed debits.
Calculating the effective APR helps you compare to other financing.
Sales volume, holdback rate, factor rate, term length and fees all impact cost.
Use scenario modelling and compare alternatives to guard your cash flow and avoid surprises.