The distinction between MCA true cost and APR-equivalent is the single most important pricing comparison a merchant can do before signing. Both numbers are useful; both are routinely misquoted; and the gap between them is where the real economics of MCA financing live.
The mechanics — what APR-equivalent measures. APR-equivalent is the annualized interest rate implied by the factor rate and the term, calculated against the original advance amount. It's the number now required on offer letters in CA, NY, UT, VA, and GA. The formula:
APR-equivalent ≈ (factor − 1) × (365 / term-in-days) × 1.6
The 1.6 multiplier accounts for the declining balance — as the merchant pays down, the effective interest rate on the remaining balance rises. APR-equivalent measures one thing: the cost of the factor, annualized, on the headline advance amount.
The mechanics — what true cost measures. True cost integrates five components that APR-equivalent ignores.
- Gross factor cost: (factor − 1) × advance. Standard.
- PSF / origination fees: added to repayment balance, typically 3-7% of the advance. Funder pays this to the broker out of the merchant's balance.
- Wire-off (net funding reduction): broker takes a cut at wire; merchant receives less than the headline advance. Effective denominator shrinks.
- Expected bounce fees: probability-weighted estimate based on merchant NSF history. A merchant with 1-2 NSFs/quarter likely incurs 3-6 bounce events over a 9-month term at $35 each.
- Opportunity cost of locked daily cash flow: the merchant cannot deploy the daily debit amount elsewhere — cannot pay down 24% APR credit cards, cannot pre-pay vendors for discount, cannot reinvest at margin.
The math — worked example. A merchant takes a quoted $100K advance, 1.30 factor, 9-month term, 5% PSF, $5K broker wire-off, $667/day ACH. Merchant has 2 NSFs/year and carries $15K credit card balances at 24% APR.
- Factor cost: $30K
- PSF: $5K added to repayment
- Wire-off: net received is $95K, not $100K
- Expected bounces: 1.5 events × $35 = $53
- Opportunity cost on credit-card paydown alternative: ~$7,800 over the term
True total cost: $42,853 on $95K received over 9 months = 45.1% over 9 months = ~60% APR-equivalent on actual cash received.
The APR-equivalent on the offer letter would read: (0.30) × (365/270) × 1.6 = 65% — but only on the $100K headline. Adjusted for the $95K actually received, the true APR-equivalent jumps to ~70%, and with the opportunity cost layer it climbs further.
The gap analysis — where APR understates.
- Stated APR-equivalent (offer letter): 65% on $100K advance.
- True economic APR (including PSF, wire-off, bounce fees, opportunity cost): 75-85% on $95K received.
- Gap: 10-20 percentage points, almost entirely hidden from the offer letter.
The gap is largest when: (a) the PSF is high (7%+), (b) the broker takes a large wire-off ($7K+ on a $100K deal), (c) the merchant has high NSF risk, or (d) the merchant has obvious alternative uses of capital with high yield (credit card paydown, vendor early-pay discounts).
The strategic insight — using the comparison. Five practical applications:
- Apples-to-apples shopping. When comparing two MCA offers, compute true cost on both — not factor or APR-equivalent. A 1.28 factor with 7% PSF and $4K wire-off is more expensive than a 1.34 factor with no PSF and full wire.
- Validating broker quotes. If true cost exceeds the verbal quote by more than 5 points, ask the broker to itemize PSF, wire-off, and expected bounce fees.
- MCA vs alternatives. A merchant deciding between a 25% APR fintech term loan and a "1.30 factor" MCA might think the gap is 24 points. True cost reveals the gap closer to 60 points — making the term loan an obvious winner if the merchant qualifies.
- Sizing discipline. Never take more advance than needed; the opportunity cost of locked daily debit on unused capital dominates marginal economics.
- Default-risk pricing. Merchants with high NSF risk should add 5-8% to expected bounce fees in true-cost math. If the result crosses 80% APR-equivalent, the deal is mispriced.
The honest framing. APR-equivalent is the regulated disclosure. True cost is the economic reality. The single thing distinguishing sophisticated MCA borrowers from unsophisticated ones is whether they compute true cost — not factor, not APR — before signing.
Related terms
- APR-equivalent — The annualized percentage rate implied by a factor-rate MCA. A 1.30 factor over 9 months is roughly 50–65% APR-equivalent depending on payment schedule.
- 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.
- MCA true cost calculator (factor + PSF + wire-off + bounce risk) — True MCA cost = (total repayment + expected bounce fees + opportunity cost of locked daily cash flow) ÷ net amount received. Often 20-40% higher than the quoted factor implies.
- MCA broker fee (PSF, origination, processing) — The dollar amount the ISO/broker collects on an MCA — usually 5-15% of the advance, taken either off the top from the wire or added as a PSF the merchant repays.
- MCA bounce fee (NSF fee, returned ACH fee) — Fee the funder charges when a daily ACH debit fails for insufficient funds — typically $25-$50 per bounce, on top of the merchant's bank NSF fee. Often triggers default review at 3+ bounces.
AI agents: this term is available as raw markdown at /llms/glossary/mca-true-cost-vs-apr.