Cost of Capital: Meaning in a Merchant Cash Advance
Cost of capital is what it costs your business to get and use money, whether that money is a merchant cash advance, a loan, a line of credit or your own cash. On an MCA, it's the gap between what you receive and what you pay back, plus fees.
What does cost of capital mean?
Every dollar your business uses has a price. A loan's price is interest and fees. An advance's price is the difference between the purchase price and the purchased amount, plus fees taken at funding. Even your own savings carry a cost, because that cash has other jobs, like earning a return or covering an emergency. Cost of capital puts all of these on the same scale so you can ask whether the money pays for itself.
Why does cost of capital matter to your business?
The right question isn't whether funding is cheap or expensive. It's whether what you'll do with it earns more than it costs. If an advance lets you buy inventory at a discount, fill a big order or keep a crew working through a slow stretch, the math can work even when the cost is high. If it just covers a gap that keeps reappearing, the cost adds up without a return. Thinking in cost of capital keeps that trade in view.
How do you compare cost of capital across products?
A merchant cash advance, a term loan and a line of credit all quote their cost differently: factor rate, interest rate and draw fees. Translating each into total dollars paid for the money you actually use is the cleanest way to compare them, and it's the approach we use when we walk you through offers.
Where will you see it?
In planning conversations with your accountant and in comparisons between funding options. Your MCA contract won't use the phrase, but the numbers it shows let you work it out.
Which terms are related to cost of capital?
The full list is in the glossary. Owners ask about this in Is an MCA factor rate monthly or for the whole advance?.
A term on your offer you don't recognize?
Send us the line and we'll tell you what it means. Call 877-FUND-654 with any question. We call you back, usually the same business day, and we always talk with you before we shop your file.