A merchant cash advance is quoted as a factor rate, not an APR, which makes it hard to compare to a loan. Estimating the APR lets you see the real annualized cost and compare apples to apples.
Start with the total cost
First, find the dollar cost. Multiply the amount by the factor rate to get total payback, then subtract the amount. Borrow $20,000 at a 1.30 factor rate and you repay $26,000, so the cost of capital is $6,000.
That $6,000 is the figure an APR calculation annualizes against how long you actually hold the money.
Factor in the repayment term
APR depends heavily on speed of repayment. The same $6,000 cost is far more expensive annualized over 6 months than over 18, because you are paying it back faster. This is exactly why a modest-looking factor rate can translate to a high APR.
To estimate APR, you relate the cost to both the amount borrowed and the time over which it is repaid, accounting for the fact that the balance shrinks as you pay.
A simple way to estimate
For a quick, rough estimate, you can use this approach:
- Cost of capital divided by amount borrowed gives the period cost rate
- Divide by the repayment term in months to get a monthly rate
- Multiply by 12 to annualize, then roughly double to reflect the declining balance
- Treat the result as an estimate, not an exact figure
Let the comparison be done for you
Estimating APR by hand gets you close, but the cleanest way to compare is to have someone run the numbers on every offer. The Broker Shop converts factor rates to comparable costs across 50+ competing lenders so you can see the true cost side by side.
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See What I Qualify For →The bottom line: A factor rate hides the true annual cost, convert it to an estimated APR using the cost and term, or let a broker compare offers so you see the real price.