[FUNd]

You identified the issue perfectly. If folks took ONE advance at those rates, there wouldnt even be this type of discussion either on this forum or on Capitol Hill. Problem is (as you highlight), it's expensive to acquire customers and most of the industry lives off renewals. And that 1.4x for five months (with a double dip renewal at 3.5 to 4 months) ends up renewing multiple times because they don't have a choice. In order for any form of lending/finance to work, the benefit (return) from the capital has to out weight the cost -- and that's impossible at an ongoing cycle of 1.4x (with a double dip, that's really a 1.55x+ over five months).

Have to figure in federal, state, and local business fees and taxes into the ROI too. So at 100% margin, they about break even at a 1.4x.

[gerayin]

Start sending all your A and B paper to Life Capital where we will give your merchant add-ons instead on renewals and save them huge $$$.

[ridextreme]

Start sending all your A and B paper to Life Capital where we will give your merchant add-ons instead on renewals and save them huge $$$.

and make less commission

[J.Celifarco]

Start sending all your A and B paper to Life Capital where we will give your merchant add-ons instead on renewals and save them huge $$$.

plenty of banks will do add ons you just have to request them instead of a refi

[bdshaw]

The responses here prove that there is no one accepted method of calculating or presenting the cost of a MCA. Many of the answers deal with the marketing aspect of the business, not the analytical.
Let me restate the question. Without trying to wiggle out of an answer what do you tell your client if they flat out ask what the interest rate is?
Bob

[FUNd]

The responses here prove that there is no one accepted method of calculating or presenting the cost of a MCA. Many of the answers deal with the marketing aspect of the business, not the analytical.
Let me restate the question. Without trying to wiggle out of an answer what do you tell your client if they flat out ask what the interest rate is?
Bob

I answer their question with a question. Interest rate? What interest rate did your local bank offer you? Oh, that's right, they didn't, because you're a deadbeat POS with a 599 FICO and a business that is barely hanging on.

[hejfund]

Maybe the problem is is that that sentiment is rather widespread in this industry. if you think your clients are deadbeat POS's then with all due respect you may be in the wrong industry.

I answer their question with a question. Interest rate? What interest rate did your local bank offer you? Oh, that's right, they didn't, because you're a deadbeat POS with a 599 FICO and a business that is barely hanging on.

[FUNd]

Maybe the problem is is that that sentiment is rather widespread in this industry. if you think your clients are deadbeat POS's then with all due respect you may be in the wrong industry.

Thanks, I'll take your sage advice under advisement.

[Cfairbank]

Have to figure in federal, state, and local business fees and taxes into the ROI too. So at 100% margin, they about break even at a 1.4x.

I was looking at it from the customers perspective -- a merchant can't survive if they are getting 20% to 30% pulls and continually renewing 1.4x 5 month deals because the return they get from that capital will never ultimately outweigh the cost.

[Cfairbank]

I was looking at it from the customers perspective -- a merchant can't survive if they are getting 20% to 30% pulls and continually renewing 1.4x 5 month deals because the return they get from that capital will never ultimately outweigh the cost.

And to be clear, I'm not here to argue about pricing, I get you need to price the risk and there is an high inherent cost in originating and funding a short term deal to a subprime customer -- my point is the problem with the current application of high cost products is the cycle on which many folks get stuck.

[AlexSMF]

I came across some content online that has me confused can you help explain how they got these numbers :

You are a advanced $20,000, the funding provider quotes you a factor rate of 1.14. So this means you will be expected to pay back $22,800. It might appear like you are paying 14% interest rate.

But the real number you want to look at here is APR. ( If the funding provider is taking 10% of all your future credit card sales your apr would actually be 36.1 and you would repay the advance in 274 days with daily payments of $83.33

Note: If this example is a poor one, can you please create one that illustrates how to calculate the true cost of a MCA

Even though you should never ever use APR when discussing a merchant cash advance, for every reason already stated on here. The simple answer to your question is, If you had an actual loan of 20,000 where the term of the loan was 1 year and the total amount payed back was 22,800, then you would do the following. You would take the a financial calculator and enter the following functions exactly as follows. 252 N, 20,000 PV 22,800 FV, 90.48 PMT, then hit CPT and then I/Y. But that does not matter because if you are selling a cash advance then there is no APR, but that has already been addressed by everyone multiple times.

[gerayin]

and make less commission

8-10 pts on all deals

[ridextreme]

8-10 pts on all deals

you can make more on a re-fi, bigger deal = bigger commission

[gerayin]

Not all merchants were created equally.
Some learned enough math to understand that a 1st @ 1.35 and a 2nd @ 1.45 is cheaper than a first @ 1.35 and a renewal @ 1.25

And we are cheaper than both.

[jotucker1983]

.......Let me restate the question. Without trying to wiggle out of an answer what do you tell your client if they flat out ask what the interest rate is?
Bob

If it's an MCA, I tell them there's no APR/interest rate associated with it. If they continue to try and calculate an APR anyway, I just continue to state there's no APR/interest rate associated with this transaction and explain to them (again) how it works, just as I did in this thread.

If it's a loan, that's a different story and that is usually disclosed in the loan agreement anyway.

I'm not calculating an APR if there's no interest rate on the deal. If you guys want to allow merchants to drag you into calculating certain types of "interest rates" on cash advances, then you can have at it, but from a "technical" and "legal" standpoint....you have no business discussing APRs nor any other type of interest rate on merchant cash advance deals.

[WhoisKingsley]

If it's an MCA, I tell them there's no APR/interest rate associated with it. If they continue to try and calculate an APR anyway, I just continue to state there's no APR/interest rate associated with this transaction and explain to them (again) how it works, just as I did in this thread.

If it's a loan, that's a different story and that is usually disclosed in the loan agreement anyway.

I'm not calculating an APR if there's no interest rate on the deal. If you guys want to allow merchants to drag you into calculating certain types of "interest rates" on cash advances, then you can have at it, but from a "technical" and "legal" standpoint....you have no business discussing APRs nor any other type of interest rate on merchant cash advance deals.

Basically APR - ANNUAL. Annual meaning a year. If a factor rate is 12 months I can see where someone will try to convert to an APR. But like John said, pretend you will turn to stone if you utter the word "loan" or "APR" if you speak of the almighty powerful MCA.

[HDF]

With all of the information available today, if the answer to this question is not solved from day one for your practice, you get what you deserve.
There are numerous products to offer. Learn them and offer them like a goddam professional. Your other choices:
1- Deceive
2- Be willfully ignorant
3- Sell an unsuitable product
4- Engage in discussion of APR on a purchase agreement
5- Stack from 3 to infinity
6- Put commission over client best interest at their cost

Or perhaps, just maybe, you become an advisor and expert in the field for your clients and seek to provide solutions. As a personal advocate for them for christs sake. And make money long term - not like the panic you might be in next week to make a number for the month.

Soap box out.

[bdshaw]

I think the responses in this thread are fascinating. Its my belief that if you give me a dollar and I have to pay you back,more that the dollar I have paid an implied interest rate. Many avoided that fact by launching into sales and marketing schemes. There were some excellent examples but not really addressing the issue. One point I don't understand is why the industry uses The approach of buying future receivables as opposed to future revenue. That may have its roots in traditional factoring .
The reason I think this is an important item is I believe future regulators with think this way also. All they have to do is look at the material the lenders give investors and banks that discuss their yield is expressed as an interest rate.

[MCNetwork]

Everyone knows a cash advance is expensive so why discuss APR? You can try to put lipstick on a pig (i.e., talk about factors, etc.) but it's still a pig. Instead focus on identifying how the advance might help the merchant and quantify his potential return on investment. If that number after paying back the cash advance "fee" is positive, then you're golden. Introducing an APR into a cash advance discussion is a recipe for disaster unless you're actually selling a low APR advance or business loan.