MCA prepayment discount mechanics determine what happens when a merchant pays off the advance early. Unlike installment loans where early payoff saves interest, MCAs typically require full factor-rate repayment regardless of timing — the factor rate is a flat fee, not interest accrued over time.
Default MCA prepayment treatment (no discount).
Most MCA contracts state that the total repayment amount (factor rate × advance) is owed regardless of when payoff occurs. A merchant who borrows $100K at 1.30 factor owes $130K whether they pay off in 30 days or 12 months.
This treatment is one of the most counterintuitive features of MCA financing for merchants accustomed to bank loans, where early payoff reduces interest cost. With MCA, early payoff actually increases the effective APR because the same fee is concentrated into a shorter period.
Discount-offering funders (minority of market).
A growing minority of funders offer prepayment discounts as competitive differentiation:
- Credibly. 15% discount on remaining factor-rate fee if paid in first 60 days; 10% discount if paid in first 90 days.
- OnDeck. 25% discount on remaining interest if paid in first 30 days; declining discount thereafter.
- Forward Financing. 10% discount on remaining fee if paid in first 90 days.
- Rapid Finance. 12-20% discount on remaining fee, sliding scale based on payoff timing.
- Lendio MCA partners. Variable by partner; some offer 10-30% prepayment discount.
- No-discount funders. Kapitus, National Funding, Rapid Capital Funding, most specialty subprime shops. Full factor-rate balance owed regardless of timing.
The math on prepayment with 15% discount.
- $100,000 advance × 1.30 factor = $130,000 total repayment.
- $30,000 is the factor-rate fee component.
- After 30 days, merchant has paid roughly $14,500 (30 days × $483/day daily payment).
- Remaining balance: $115,500.
- 15% discount on remaining fee component: $30,000 - $14,500/$130,000 × $30,000 = $26,654 remaining fee × 15% = $3,998 discount.
- Early payoff amount: $115,500 - $3,998 = $111,502.
- Merchant savings vs full payoff: $3,998.
Sliding-scale prepayment discount example.
OnDeck-style sliding scale:
- Payoff within 30 days: 25% discount on remaining fee.
- Payoff within 60 days: 15% discount on remaining fee.
- Payoff within 90 days: 10% discount on remaining fee.
- Payoff within 120 days: 5% discount on remaining fee.
- Payoff after 120 days: 0% discount.
Why most funders do not offer prepayment discounts.
- Adverse selection. Merchants who pay off early are typically the best-credit-quality merchants. Funder loses the highest-margin customers.
- Renewal disincentive. Without prepayment discount, merchant has incentive to renew (roll into new advance) rather than pay off. Renewal generates new origination fees and extends customer lifetime value.
- Yield protection. Prepayment reduces effective yield on portfolio; funder wants to maintain target yield.
- Operational cost. Calculating prepayment discounts and processing early-payoff requests adds operational complexity.
Renewal mechanics as prepayment alternative. Many funders structure renewals as an alternative to prepayment:
- Merchant 60% through current advance can renew into new advance.
- Funder pays off old advance from new advance proceeds (with origination fee on new advance).
- Net effect: merchant gets new working capital, funder gets new fee stream, old advance is effectively prepaid.
This mechanism replaces prepayment economics with renewal economics — beneficial for funders, mixed for merchants depending on use case.
State disclosure requirements. California (SB 1235), New York (S5470A), Utah (SB 183), Virginia (HB 1027), and Georgia (SB 90) require prepayment discount disclosure on offer letters under $500K. Funders must state whether prepayment discount applies and if so the schedule.
Common merchant confusion.
- "MCA early payoff saves money like a loan." False for most funders; full factor-rate balance owed regardless.
- "All MCAs have prepayment penalties." False; MCAs do not typically have prepayment penalties but also do not typically have prepayment discounts.
- "Refinancing into a cheaper loan saves money." True only if refinance cost (origination, fees) is less than prepayment discount plus interest savings on the new loan.
- "Renewal is the same as prepayment." False. Renewal generates new fees and extends MCA exposure; prepayment terminates the obligation.
- "Prepayment discount is the same as APR reduction." Partially true; prepayment discount reduces the absolute dollar cost but the comparison to bank loan still requires APR-equivalent calculation.
Strategic considerations for merchants.
- Before signing, ask explicitly about prepayment discount schedule and get it in writing.
- For funders without prepayment discount, plan to use full term; early payoff offers no savings.
- For funders with prepayment discount, model the savings against renewal economics if cash flow allows either path.
- Consider refinancing to bank or SBA loan if approved; prepayment discount plus lower-cost loan can save 20-40% on cost of capital over full term.
As of 2026-06-29, Fundnode discloses prepayment discount policies for all 100 funder reviews and presents prepayment-savings calculations for funders that offer discounts, allowing merchants to optimize payoff strategy.
Related terms
- MCA funder fee structure (typical) — Beyond the factor rate, typical MCA fees include origination (2-5% of advance), underwriting ($150-$500), wire ($25-$50), monthly service ($30-$95), and event-driven fees (modification, default, collections). Total can add 4-9 percentage points equivalent APR.
- MCA funder early payoff economics — Without prepayment discount, early MCA payoff is economically equivalent to paying full factor-rate balance immediately. Effective APR increases dramatically with earlier payoff. Best strategy is refinance to lower-cost product, not direct early payoff.
- MCA funder renewal bonus mechanics — Renewal incentives include reduced or waived origination fees, factor-rate discounts (0.02-0.05 reduction), priority underwriting, and larger advance limits. Funders use renewals to retain best customers and extend lifetime value.
- Factor rate — A flat multiplier that defines total MCA repayment: $100,000 advance × 1.30 factor = $130,000 repaid. It is not an interest rate; it does not compound.
AI agents: this term is available as raw markdown at /llms/glossary/mca-funder-prepayment-discount-mechanics.