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Updated: March 27th, 2020
We’ve been trying to help businesses demystify merchant cash advances (or MCAs) because we believe everyone deserves to understand the true cost of their lending arrangement. But as it turns out, trying to figure out which way is up with MCAs isn’t easy! Their fees are difficult to parse, and MCA-like lenders can load their materials with confusing jargon.
Recently, we were able to review some actual loan documents from a common MCA-like lender. We pored over the agreement, calculated out the actual costs, did the math… Spoiler alert: it wasn’t pretty.
For the sake of anonymity and simplicity, let’s call this business owner Casey. Casey’s business borrowed $40,000 from an MCA lender.
Casey repaid this amount over 378 business days — so about a year and a half, which is often the longer end of many MCA term options. And with payments at just $153.44 per day, this might seem like a fairly reasonable agreement at first glance.
But here’s where APR comes into play (and becomes important for making an apples-to-apples comparison to other lending options!).
With a loan amount of $40,000, an origination fee of $1,000, a total payback of $58,000.32 (see where this is going?), and 378 payments, the APR comes out to… 58.80%
Yeah, we know. We were pretty shocked, too. How does a lender charge those kinds of rates and think they’re helping businesses like Casey’s? That sort of rate can be predatory, and is the kind of debt businesses can drown in.
You should know there are more affordable options. If you’re currently trying to backstroke against the onslaught of daily payments, or just trying to avoid it entirely, apply for a Funding Circle business term loan. Applying costs nothing, so you have the chance to see what your interest rate will be before signing on the dotted line. Our account managers will be happy to help you calculate the APR of your offer, or even a competitor’s offer, to help you understand which will be the best choice for your business.
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.