The annual percentage rate (APR) is a standard measure of the amount of financing cost you have to repay on a given loan, advance, or financing. Knowing the APRs offered by merchant cash advance companies allows you to quickly compare them so you can choose the MCA that is most affordable for you. However, some merchant cash advance companies use tricks to hide the true APR of the MCA.
1. Financing Fees
Some merchant cash advance companies advertise a low headline payback rate, but then apply financing fees that increase the true cost of your merchant cash advance. They justify these fees by claiming that they cover administration costs, but the size of the fees is often unreasonably high. You may be asked to pay a flat financing fee, a fee that is a percentage of the amount you want to borrow, or both. Fees can significantly push up the APR of merchant cash advances.
2. Shorter Payback Periods
When shopping for a merchant cash advance, pay close attention to the payback periods. Some lenders offer cheap credit, but expect you to pay the money back very quickly. This means you are effectively paying a higher APR, as the interest is being charged over a very short period. Be cautious before taking out a short-term loan or MCA, as it could lead to problems down the road. If you are unable to pay the money back in time, you could face penalties or be forced to roll your MCA over into a more expensive option.
3. Daily or Weekly Payments
Some merchant cash advance companies lock you into a daily or weekly payment schedule, which can increase the effective cost of your MCA. A good rule of thumb is that the more frequently you make payments, the higher the APR because the principal is amortizing faster. So a lot of merchant cash advance companies increase the frequency of payment to juice their APR, and more often than not, the business owner is none the wiser. (All they know is that the daily payments eat through their cash flows.)
Pro Tip: Calculate the True Cost of Your Merchant Cash Advance
Before you sign anything, use the Able True Rate Calculator to calculate the true rate of your MCA. By calculating the true cost of your cash advance, you can work out whether you have a good deal.
In our experience, 10 out of 10 business owners are shocked to discover their true APR. It’s typically at least twice as high as they thought it was. Of course, for some business owners it doesn’t matter. But you at least deserve to know!