What Is Your Merchant Cash Advance Actually Costing You?

Why MCAs don't show you a real interest rate

When a bank lends you money, they have to tell you the APR — the Annual Percentage Rate. It is a legal requirement under the Consumer Credit Act, and it lets you compare the cost of borrowing across different products on a like-for-like basis.

Merchant cash advances sidestep this entirely. They are not structured as loans. Legally, an MCA provider is purchasing a portion of your future card sales at a discount. No loan, no Consumer Credit Act, no requirement to quote an APR.

Instead, they use a factor rate — a multiplier applied to the amount you receive. If you take £50,000 at a factor rate of 1.3, you repay £65,000. That's a cost of £15,000, or 30% of the advance. Clear enough in isolation. The problem is that 30% is not 30% per year — it is 30% of the advance amount, paid over however long it takes you to repay. And the equivalent annual cost varies enormously depending on how fast that repayment happens.

Lenders use this ambiguity to avoid quoting a number that would cause most businesses to walk away. The equivalent APR on a typical MCA is very high — and this guide will show you how to work it out.

How to calculate the real APR on your MCA

This is not exact — MCA repayments fluctuate daily with your card sales, so a true APR calculation requires modelling daily cash flows. But this method gives you a solid approximation that is accurate enough to make a decision.

The table below shows how the same factor rate translates to very different equivalent APRs depending on repayment speed. This is the key insight: the faster your card sales are, the faster you repay — and the higher your effective annual cost.

Equivalent APRs are approximate, calculated using simplified annualisation. Actual APR depends on the exact daily repayment pattern. All figures are illustrative.

Three worked examples

Abstract numbers are easy to ignore. Here are three concrete scenarios — the kind of situations that are common in retail, hospitality, and trade.

Why the daily deduction makes it worse than the rate suggests

On a term loan, you make one payment a month. The money sits in your account until the direct debit goes out. You have full use of it in between.

An MCA works differently. A percentage of every card transaction — typically 10–25% — goes directly to the MCA provider. Every day. Before you see it.

In a good week, more goes out because more comes in — which clears the advance faster, increasing the equivalent APR. In a slow week, less goes out — but it still goes out. There is no period where the business keeps everything it earns.

The cash flow impact goes beyond just the interest cost. A business with a £60,000 MCA at a 15% retrieval rate is sending 15p of every card pound to the lender before it reaches the business account. If you are a hospitality business doing £30,000 a month on card, that is £4,500 a month leaving before you can pay suppliers, wages, or rent.

The rollover trap

This is how businesses end up in a cycle they did not see coming.

When you have repaid 50–70% of your advance, many MCA lenders will call to offer a top-up or a new, larger advance. It is framed as a reward for good repayment behaviour. "You have been a great customer — here is more working capital."

What actually happens: the outstanding balance on your existing advance is rolled into the new one. The factor rate resets on the entire new amount.

If your MCA lender calls to offer a top-up, the right question to ask is: what would it cost to refinance the full outstanding balance into a term loan instead? A broker can run that comparison in a few minutes. The answer is often striking.

How does your MCA compare? A quick check

If you have an MCA, here is how to get a rough sense of where you stand. You need three numbers:

1. Your advance amount — how much you received
2. Your factor rate — it will be in your agreement (e.g. 1.25, 1.3, 1.35)
3. How long ago you took it out — and roughly how much you have repaid so far

From those three numbers:

• Cost of capital = (factor rate − 1) × advance amount. On £50,000 at 1.3 that is £15,000.
• Approximate APR = cost of capital as a % of advance, divided by repayment term in years. See the table earlier in this guide.
• What a term loan would cost = run the numbers in our business debt consolidation calculator.

If the gap between your MCA equivalent APR and a typical term loan rate (12–18% APR) is significant — and in most cases it will be — it may be worth exploring whether refinancing makes sense. Use our 5-question decision tool if you are not sure where to start.

What are your options if your MCA is costing too much?

There is no single right answer. It depends on your credit profile, how much you owe, and what else is on your balance sheet. But these are the main routes worth exploring:

Refinance into a term loan

For most businesses with an MCA that is running normally (not in arrears), this is the most straightforward option. A specialist commercial finance broker can approach lenders who understand MCA refinancing. You use the term loan to settle the MCA, then repay the term loan at a fixed monthly payment over an agreed period — typically at a significantly lower equivalent rate. See our full guide to exiting a merchant cash advance for the step-by-step process.

Settle the MCA early

Many MCAs do not charge early repayment penalties — you simply pay the outstanding balance. If you have access to reserves or can raise the funds another way, settling early stops the daily deductions immediately. Check your agreement or ask for a settlement figure in writing before assuming this is available.

Roll it into a consolidation loan

If you have an MCA alongside other business debts — a term loan, a credit card, an overdraft — consolidating everything into one loan can simplify your finances and reduce total monthly outflow. The MCA is usually the most expensive component, so replacing it is where the biggest saving comes from. Our guide to whether you are overpaying on business loans covers this in detail.

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