Small business owners in New York City, listen up: If you’ve taken a merchant cash advance (MCA), you need to know what factor rate you have agreed to and how much it could cost you. But what exactly is it a “factor rate”? Let’s break it down.
Factor rates: not the same as interest rates
A factor rate is a simple number that, when multiplied by your advance amount, determines the total you’ll owe. Unlike traditional interest rates, factor rates are expressed as a decimal figure, typically ranging from 1.1 to 1.5. This rate is pivotal as it encapsulates the cost of capital for your MCA. For example, if you take out a $10,000 MCA at a factor rate of 1.25, your business will ultimately pay $12,500 in repayment plus fees.
Factor rates are calculated by various factors, including:
- The industry your business competes in
- How long you have been in business
- Sales consistency
- Average monthly credit card sales
The high price of MCAs
MCAs are usually more expensive than traditional small business loans from banks. MCA companies justify this by claiming they are taking a greater risk due to MCAs only being secured by business equipment, not real estate. You should also keep in mind that your repayments typically come weekly or daily as a slice of your sales goes towards this debt until it’s settled in full.
When the weight becomes crushing
If your MCA is turning into a financial nightmare and you’re at risk of losing essential equipment, it’s time for professional intervention. Consulting with an attorney who specializes in MCA law could provide you with the strategies you need to address this burden. Don’t wait until it’s too late — seek legal advice to explore your options and protect your enterprise.