[IamGrateful]

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

[FUNd]

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

Where is your sales manager?

[sigmundpannu]

FUNd I agree. Who is training you? Or did you just decide to jump in by yourself? Plus- apr has been addressed several times on this forum. Maybe utilize the search bar????

[evercap]

I am not greatful that this is who is selling cash advances.....

[Zach]

Cost of MCA is the factor rate multiplied by the funding amount, plus fees (if applicable).

[KTK]

Take the payback/purchased amount and enter it into a calculator. Minus the funding amount, hit equals (=) BAM!!

[bdshaw]

I understand that you all feel that you must quote cost in dollars, but, is,that what you're really being asked?
z
Bob

[bdshaw]

having problems with spell check...appoligies

[KTK]

I was just messing around Bob

[jotucker1983]

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

- In this example, the "true cost" of the transaction is $2,800.

- There's no interest rate nor APR associated with a merchant cash advance transaction. A merchant cash advance is a purchase of future receivables.

- Basically, Joe at Joe's Meat Market does $25k a month in V/MC processing volume. A guy from XYZ Capital up the street calls Joe and says that he will buy $30,000 of his upcoming V/MC processing volume, in exchange for providing him $25,000 upfront tomorrow. To collect that $30,000 purchase, the guy from XYZ Capital wants to take 20% of Joe's daily V/MC batches.

- So on this deal in this example, you would have a 20% holdback and a "true cost" of $5,000 which comes out to a cost factor of 1.20, based on the $25,000 advance amount. Based on Joe doing $25k a month in V/MC volume in the past, if he keeps doing that going forward, XYZ Capital should collect their full $30k purchase in 6 months.

[bdshaw]

I wasn't pointing fingers ☺
my question was more general.
This is an interesting question
Bob

[bdshaw]

Jotucker I respectfully disagree. Your stating your definition of cost but we all know there is an implied interest rate. We've used the same logic in factoring for years but when asked about cost I think we're being asked about interest rate. I'm the leasing business we defined a lease factor as a way to avoid stating the effective interest rate.

[jotucker1983]

Jotucker I respectfully disagree. Your stating your definition of cost but we all know there is an implied interest rate. We've used the same logic in factoring for years but when asked about cost I think we're being asked about interest rate. I'm the leasing business we defined a lease factor as a way to avoid stating the effective interest rate.

Well, I agree in that when we are asked the "true cost" of the MCA, they are "trying to get us" to calculate an APR. The issue is that there's no APR or interest rate associated with the transaction, so I shouldn't be calculating it even if it's requested. I should instead be educating the merchant on the difference of an MCA v.s. that of a Loan.

Interest rates (along with their associated APRs) are associations of loan transactions, which have fixed payments and fixed terms. There's no fixed payment nor fixed term with a merchant cash advance transaction (legally), even though in a lot of ways "we" sell it as such.

[bdshaw]

Ok, I understand that but, what if the client restated the question as I borrow x dollars and payback 1.4x dollars over a year. What's the cost then?

[Zach]

A simple way to estimate APR is to find the 12-month factor equivalent, multiply by 2, and subtract a few points.

For example, a 6-month 1.30 is equivalent to roughly a 12-month 1.60, which equates to roughly 110% APR.

It is well-understood that with a cash advance there is no true APR, however there is an implied interest rate, exactly the same as within the equipment leasing space. It is literally a tactic designed to mask and hide the cost of the transaction, rather than disclose and inform the client for a real comparison.

There is a reason why a client will say things like: "1.69 for 12 months? You guys are way too expensive! I have an offer for 1.40 for 4 months." The 1.69 is almost half the APR; a much stronger financial instrument and a much wiser decision for the client.

The reason this insanity happens is because the client has been deceived by misleading marketing tactics like "factor rates."

[dpFund]

There is so much deception and misinformation in regard to interest rates in our industry. I simply answer by telling the client to look at the total cost of funds. While not a perfect answer by any stretch, this seems to dispel a lot of the confusion and level the playing field.

[jotucker1983]

Ok, I understand that but, what if the client restated the question as I borrow x dollars and payback 1.4x dollars over a year. What's the cost then?

If it's a MCA, there's technically (from a legal standpoint) no "over a year" time frame, as that would be establishing a fixed term.

So if Joe Meat Market is doing $20k a month in V/MC and XYZ Capital wants to purchase $28,000 of Joe Meat Market's credit card processing receivables, in exchanging for funding him $20,000 tomorrow, they can set his holdback at 12%.

This provides your 1.40 factor rate and as long as Joe's Meat Market continues to do $20k a month in V/MC going forward, it will take 12 months for XYZ Capital to fully collect their $28,000 purchase which assumes XYZ Capital collects about $2,400 a month.

However, Joe's Meat Market could have a slow season that slows down the collection from let's say $2,400 a month to maybe $1,700 a month on average. Technically, XYZ Capital would have to wait longer than "estimated" originally to collect their full $28,000 purchase unless (and some companies do this) they go in and adjust the holdback higher.

Me personally, if I'm selling a purchase of receivables (be it MCA or A/R Factoring), I absolutely do not discuss any type of interest rates or APRs, because they are not applicable to the transaction.

Merchants are used to dealing with loan transactions, not factoring/purchase transactions, thus, to calculate the "true cost" of something they always like to use an interest rate formula. But there's no such formula with a factoring/purchase transaction.

[ridextreme]

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

why on earth would you want to compare an MCA with an APR? Do you like scaring your clients away? Or are you letting the merchant close you instead of you closing the merchant?

[Cfairbank]

Well, I agree in that when we are asked the "true cost" of the MCA, they are "trying to get us" to calculate an APR. The issue is that there's no APR or interest rate associated with the transaction, so I shouldn't be calculating it even if it's requested. I should instead be educating the merchant on the difference of an MCA v.s. that of a Loan.

Interest rates (along with their associated APRs) are associations of loan transactions, which have fixed payments and fixed terms. There's no fixed payment nor fixed term with a merchant cash advance transaction (legally), even though in a lot of ways "we" sell it as such.

While APR may not ultimately be the "right" universal measure to compare financing alternatives, I do support coming to a uniform way to allow customers to compare options (to Zach's point, factor rate can also be misleading) -- and the same way we can argue that APR "overstates" the cost of short term products, total payback does the same thing for the low APR, longer term alternatives. John let me ask you this -- are the bulk of your deals still cash advances or are they increasingly loans? Most of the larger A paper players have switched to a loan product. We (Breakout) fund more in loan volume than cash advance volume as well (though we still do offer both). In that case, there is a term and there is an APR even if current industry convention dictates that these loans are still presented in factor rates or cents on the dollar. I agree you can't calculate APR on a cash advance; curious on broker feedback as it pertains to short term loans.

[jotucker1983]

Thanks Carl.

Most of my deals are increasingly becoming "loan" transactions with fixed daily or weekly schedules along with fixed terms. In said case, the discussion in relation to interest rates would be applicable (in my opinion).

When I submit my deals, they might be approved as an MCA or a Loan merchant. When they are approved as either, I explain the type of transaction and then go over the details of the agreement going forward. If it's approved as an MCA, I explain that there's no interest rate or APR associated with the transaction as it's a purchase of receivables. If it's approved as a Loan, then that's a different story.

[Scott Williams]

The benefit of the APR term loan is it usually comes with a discount for early payback. Some MCA funders have lowered their buy rates on top tier programs where the overall cost can be lower than an APR term loan (if the merchant keeps open the funding for the full term).

[Zach]

Even though APR is something we need to understand on the brokering side, educating merchants on the actual APR of our products typically results in a dead deal. I just compare the total cost of funds to the revenue they expect to save/generate, and show them that they will be better off by taking our funds.

[NoBigDeal]

I wonder though, if a merchant takes a short term, 1.40, 5 month deal for $10k and never takes an advance again (of course, this generally doesn't happen since we're all about the renewals), why would there ever be a thought process related to APR? As opposed to simply stating the simple cost of $4,000 to borrow the $10k?

[BankComplianceGuy]

Interest rates (along with their associated APRs) are associations of loan transactions, which have fixed payments and fixed terms. There's no fixed payment nor fixed term with a merchant cash advance transaction (legally), even though in a lot of ways "we" sell it as such.

There's always an implicit interest rate. A transaction that involves a stream of payments extending over multiple future periods must incorporate an interest rate, even if there is no rate stated in the related business contract. This is also the most acceptable way for merchants to record and deduct this as an interest expense on their tax returns. This is the way its been done for decades with leasing.

[Cfairbank]

I wonder though, if a merchant takes a short term, 1.40, 5 month deal for $10k and never takes an advance again (of course, this generally doesn't happen since we're all about the renewals), why would there ever be a thought process related to APR? As opposed to simply stating the simple cost of $4,000 to borrow the $10k?

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).