The true cost of a merchant cash advance

The true cost of a merchant cash advance is the total you repay minus the cash you actually receive. That number is set by the factor rate and any fees withheld at funding. How fast you repay it then sets the APR. A $100,000 advance at a 1.35 factor rate with a $3,000 fee costs $38,000 in every scenario, but that is about 98% APR if sales repay it in 8.6 months.

Advances are a real tool for fast, flexible money. Here is how to see the full price before you sign.

The parts of the price

A worked example, start to finish

Your broker brings this offer:

• Advance: $100,000
• Factor rate: 1.35
• Fee withheld at funding: $3,000
• Holdback: 15% of daily card sales
• Your average card sales: $5,000 per business day

Cash you receive: $100,000 minus $3,000 = $97,000.

Total you repay: $100,000 × 1.35 = $135,000.

True dollar cost: $135,000 minus $97,000 = $38,000. That is $35,000 of finance charge plus the $3,000 fee.

Daily payment: 15% × $5,000 = $750.

Expected term: $135,000 ÷ $750 = 180 business days, about 8.6 months.

APR: the rate that turns $97,000 today into 180 daily payments of $750 is 97.9%.

What happens when sales change

On a percentage-of-sales advance, the term moves with your revenue. The total does not.

A slow season makes the advance take longer, which lowers the APR and eases the daily pull on cash. A strong season pays it off faster, at a higher APR. Either way, you repay $135,000.

On a fixed daily debit, the payment does not fall when sales fall. Ask your broker which kind you are being offered and whether the funder will adjust payments, often called a reconciliation, if revenue drops.

Why early payoff rarely saves money

Ramp notes that with most advances there are no interest savings from early repayment, because the full repayment amount is fixed. If you pay off the $135,000 advance in month 4, you still pay $135,000. Some funders offer a written early payoff discount. If yours does, get it in the contract with exact numbers. See prepayment and early payoff.

The cost of stacking

Stacking means taking a second advance while the first is still being repaid. Say that three months into the example above you take another $50,000 at 1.40, repaid over 6 months.

• Second advance repays $70,000, or $555.56 per business day over 126 days
• Its APR alone is about 142%
• Your combined daily payments become $750 + $555.56 = $1,305.56
• That is about $27,400 a month leaving your account on 21 business days

Stacked payments are the most common reason advances become hard to carry. A good broker will tell you plainly when a second position does not fit your cash flow, and will look for a consolidation or longer-term product instead.

What the law now requires funders to show you

Disclosure rules have made the true cost easier to see:

• Virginia requires the disbursement amount after fees, the finance charge, the total repayment amount, the estimated number of payments, other fees and the broker's compensation. Virginia also bans confession of judgment clauses in sales-based financing contracts.
• Texas HB 700 requires providers to disclose all costs on offers under $1 million, makes confession of judgment provisions void, and requires brokers to register with the Office of Consumer Credit Commissioner by December 31, 2026.
• New York and California require an estimated APR on most advances.

Read commercial financing disclosure laws for every state.

Specific practices to watch for

The FTC's 2020 case against Yellowstone Capital alleged the funder overstated the amount businesses would receive by deducting fees not shown on the contract, and kept withdrawing daily payments after contracts were repaid. Protect yourself by checking:

• The disbursement amount on the contract matches what lands in your account
• Every fee is listed before you sign
• The total repayment amount is written in dollars
• You track payments and stop debits once the total is reached

When an advance is the right call

The Federal Reserve's 2025 Small Business Credit Survey found merchant cash advances had the highest full approval rate of any product, 48%, against 45% for lines of credit and 35% for loans. Speed and approval are real benefits. An advance often makes sense when:

• A specific, short-term need will repay itself quickly
• Bank or SBA funding cannot close in time
• Card sales are steady and a percentage-of-sales payment protects slow weeks

It makes less sense for long-term projects, or when you already carry one or more advances.

Cost per dollar of profit, not just per dollar borrowed

One more way to judge an advance: compare its cost with what the money will earn. In the example, $97,000 of usable cash costs $38,000. If it buys inventory you will sell for a $60,000 gross profit within six months, the advance pays for itself with room to spare. If it covers a payroll gap with no new revenue behind it, the $38,000 comes straight out of future profit. Ask your broker to help you test the use of funds this way. A broker who asks what the money is for, and whether it will earn its cost, is looking after your business.

Get the number before you sign

Ask your broker for four figures on every advance: cash received, total repayment, daily or weekly payment, and APR. Verified entries on the register show fees in writing, and merchant cash advance brokers work these numbers every day. For the conversion method, read APR vs factor rate.