How to Calculate a Merchant Cash Advance

Calculating the total repayment amount for a merchant cash advance (MCA) involves understanding the unique structure of the financing, which uses a factor rate instead of a traditional interest rate. Below, we outline the steps to accurately calculate your MCA repayment.

The first step in the calculation is to identify the advance amount, which is the lump sum of cash you receive upfront from the lender. For example, if a lender provides you with $10,000, that is your advance amount.

The factor rate is a decimal figure that lenders use to determine the total cost of the advance. This rate typically ranges from 1.1 to 1.5, though it can be higher or lower depending on the lender’s assessment of your business’s risk profile. A lower factor rate usually indicates a lower risk, while a higher factor rate may reflect the lender’s perception of higher risk.

To find the total amount you will repay, simply multiply the advance amount by the factor rate.

Example Calculation:

• Advance Amount: $10,000
• Factor Rate: 1.25

In this scenario, you would repay $12,500 in total, which comprises the original $10,000 advance and an additional $2,500 in fees.

Next, you will need to calculate the daily or weekly repayment amounts, which are often referred to as the “holdback.” This amount reflects the portion of your sales that will be deducted automatically as repayment.

1. Find the Holdback Percentage: This is the percentage of your daily or weekly credit and debit card sales that will be withheld for repayment. It often ranges from 5% to 15%, depending on the lender.
2. Estimate Your Daily or Weekly Card Sales: Use your recent sales data to calculate an average for your daily or weekly credit and debit card sales.
3. Multiply Your Sales by the Holdback Percentage: To calculate your daily or weekly repayment amount, multiply your estimated sales by the holdback percentage.

Example Calculation:

• Holdback Percentage: 10%
• Daily Card Sales: $1,000

This means that $100 will be automatically deducted from your sales daily to repay the advance.

• Variable Repayment Amounts: It is crucial to understand that the actual repayment amount will fluctuate with your sales. If your sales are higher, you will repay the advance more quickly. Conversely, if your sales decline, your repayments will slow down accordingly. This feature makes MCAs a flexible option for businesses whose revenues may vary seasonally or due to market conditions.
• Understanding Total Costs: While calculating factor rates and repayment amounts is straightforward, it is worth noting that the factor rates can often translate into high Annual Percentage Rates (APRs). Therefore, it is essential to understand the total financial implications of an MCA and compare it to other financing options to ensure it meets your business needs.

At Canada Business Loan Experts, we are here to help you navigate the calculations for “How to Calculate a Merchant Cash Advance” and find the best funding solutions tailored to your business situation. Contact us today for a free, no-obligation quote and to gain a clearer understanding of what a merchant cash advance can mean for your financial future.