A merchant cash advance (MCA) is ideal for firms that make sales via card terminals. Unlike standard business loans, this short-term finance option doesn’t come with set monthly payments, but involves repaying funds with a percentage of future credit or debit card transactions.
MCAs are especially suited to businesses with inconsistent revenue and those impacted by seasonality. Here, we look in detail at how much an MCA costs.
How is the cost of a merchant cash advance calculated?
In the UK, an MCA costs a fixed fee instead of interest, and the fee is calculated with a factor rate. Factor rates usually range from between 1.1 and 1.5 and are influenced by several different factors. To calculate the total repayment cost, you must multiply the amount advanced by the factor rate. For instance, an MCA for £10,000 at a factor rate of 1.2 will cost £12,000.
What influences the factor rate?
When businesses apply for an MCA, lenders consider various factors to determine the factor rate. These include the company’s revenue and profitability along with their credit score. Additionally, their payment processing history is reviewed, and the volume of card sales they experience.
Other potential costs involved in a merchant cash advance
Some costs may be deducted from the MCA amount before firms receive funds. This means they get less capital than initially requested. For instance, administrative fees are often charged for the cost of setting up an account and processing the advance. If an MCA is accessed through a broker, they may receive a commission from the lender, and this may or may not come out of the advance.
Unlike conventional loans, paying off an MCA early doesn’t reduce the overall cost of the advance, as the total repayment amount is set by the factor rate under the agreement. Although most MCAs do not have penalties for early repayments, potential costs related to repaying early can include reduced working capital.
At AJL Finance, we help companies that take credit and debit card payments to secure merchant cash advances. Use our eligibility checker to assess whether you can apply for this finance option, or contact us today for further details.
