[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?

[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.