Merchant cash advances, with the real numbers

A merchant cash advance is a sale of your future receivables. A funder hands you a lump sum and collects a larger fixed amount out of your daily deposits. The price is quoted as a factor rate, and a factor rate of 1.4 on a nine-month payback works out to roughly 95% APR. This page covers the cost, the kind of business an advance suits, and what you can do if you have already signed one.

How the money works

The funder advances a lump sum, and you agree to pay back a fixed total: the advance multiplied by a factor rate, which usually falls between 1.1 and 1.5. Take $50,000 at 1.40 and you owe $70,000. The funder collects it through daily or weekly debits, set as a share of your card sales or bank deposits, until the $70,000 is paid.

The $20,000 is owed whether repayment takes six months or twelve, and you pay the balance down every business day, so you never hold the full $50,000 for the full term. That is why 1.40 over nine months comes to about 95% APR, and why the same factor rate over six months costs more per year. Because the deal is written as a purchase of receivables instead of a loan, it usually falls outside the state usury caps that would apply to a loan at that price.

Where an advance fits, and where it does not

Advances exist because they fund fast, often within 24 to 48 hours, and because funders approve businesses a bank would turn down: thin credit files, seasonal cash flow, an owner who needs the money this week. If the alternative is missing payroll or running a personal credit card to the limit, an advance can be the least-bad choice.

Used month after month, an advance is expensive money. The trouble usually starts with a second advance taken to cover the daily debits on the first, which is called stacking, and the getting out guide is written for owners in that spot. If you can qualify for a term loan, a line of credit or an SBA loan, the gap is large: the $50,000 that costs $20,000 as an advance costs about $2,500 as a nine-month term loan at 12%. In New York City, advances are common among restaurants, retail storefronts and contractors, and NYC Small Business Services offers free financing counseling you can use before you sign a second one. The cheaper local options are in our table of small business loans in NYC.

Two New York rules to know before you sign

Many merchant cash advance agreements, older ones especially, include a confession of judgment: a clause that lets the funder get a court judgment against you without a hearing if it says you defaulted. Since August 30, 2019, New York has barred filing these against signers who live outside the state. New York businesses are still exposed, and the guide linked below shows how to find the clause in your own agreement.

The second rule is disclosure. Since August 2023, New York’s Commercial Finance Disclosure Law has required funders to give you a standardized cost sheet, including an estimated APR, on offers of $2.5 million or less. The New York State Department of Financial Services enforces it. If an offer arrives without that sheet, ask for it before you do anything else, then run the numbers through the NY offer checker.

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