Does an MCA Have Principal and Interest?
No. A merchant cash advance has a purchase price and a purchased amount instead of principal and interest. The difference between them is the cost, fixed when you sign, rather than interest that accrues over time.
Which two numbers replace principal and interest?
The purchase price is what the funder pays you for a share of your future sales. The purchased amount is the total of those sales you agree to deliver. You'll see both on the contract. Divide the purchased amount by the purchase price and you get the factor rate.
Why isn't the MCA cost interest?
Interest is the cost of borrowing money, charged over time on what you owe. A true MCA isn't a loan. The funder buys receivables and takes the risk that your sales fall short. That's why the contract has a reconciliation clause, why the cost is fixed and why paying faster doesn't lower it. Courts look at these features when deciding whether an agreement is a real sale or a loan in disguise.
Why do people still talk about rates?
Owners naturally compare funding by rate, and an estimated APR helps put an advance next to a loan. The APR on a short advance often looks high because the fixed cost is concentrated in a short period. It's a useful comparison tool, but it's an estimate. On a true MCA, the real term depends on your sales.
What does it mean for an early payoff?
Because there's no running interest, paying off early doesn't automatically save money. Some contracts include an early payoff discount, which is the only way paying early reduces the total. Check for it before you plan a payoff.
What does it mean for your books?
Your accountant will decide how to record the advance and its cost. Without a principal and interest split, the treatment differs from a loan, so ask before the first payment.
When does a contract look like a loan?
If your contract has a fixed term, no reconciliation and payments that don't change with sales, it behaves more like a loan. Some states treat these differently for disclosure and legal purposes. If you're unsure what you signed, ask a business attorney.
How is the cost spread across payments?
Because the cost is fixed, every payment carries the same share of it. On a loan, early payments are mostly interest and later ones mostly principal. On an advance, the first debit and the last debit deliver the same slice of the purchased amount, so there's no point where the advance suddenly gets cheaper to carry.
Why compare offers in dollars?
When you compare offers, set the rate talk aside for a moment and look at dollars: what lands in your account and what you'll pay back in total. That comparison is simple and hard to argue with.
How can Afterfirst help with this?
Call 877-FUND-654 if you want us to walk through the purchase price, purchased amount and factor rate on your offer. We'll show you what the advance really costs in dollars and how it compares with a loan.
What else do owners ask about this?
- Does a merchant cash advance have an amortization schedule?
- Is an MCA factor rate monthly or for the whole advance?
- What does an MCA payment look like on my bank statement?
More short answers on this topic are on the after you're funded FAQ, and the MCA early payoff calculator runs the numbers for your own file.
Have a question we didn't answer?
Ask us on the call. 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.