Why this matters to you
Understanding the funder's P&L isn't an academic exercise. It tells you where the negotiating room is, why a renewal offer often comes in much cheaper than your first deal, why direct-to-merchant lenders (Square, Toast, PayPal) can quote 1.08 factors, and why the ISO who "shopped your deal to twelve funders" is the reason your factor was 1.38 instead of 1.28.
A $50,000 MCA at a 1.30 factor generates a $15,000 gross fee for the funder. Most merchants assume the funder pockets all $15,000. The real economics look very different.
The four cost buckets — line by line on a $50K deal
Take a typical $50,000 advance at a 1.30 factor with a 12-month daily-ACH term. Gross fee: $15,000. Where does it actually go?
1. ISO/broker commission — the biggest single bucket
If the deal came through an ISO (Independent Sales Office) — the broker who took your call, ran your bank statements, and "shopped" you to funders — the funder typically pays that ISO 8–15 points on funded amount. On a $50K deal, that's $4,000–$7,500 paid out before the funder books a dollar of revenue.
The exact commission depends on volume tier (high-volume ISOs get bigger splits) and merchant quality (A-paper deals pay smaller commissions; D-paper deals pay bigger ones because they're harder to place). A first-time merchant going through a retail-style ISO almost always sees a 12–15 point commission baked into the factor.
2. Cost of capital — the funder borrows too
MCA funders don't fund out of pocket. They draw on warehouse credit lines from larger financial institutions or family offices at 8–14% annualized. On a 12-month $50K deal, the interest cost the funder pays on that capital is roughly $2,000–$3,500.
This is why MCA factors will never get as low as bank loan rates — the funder's cost of capital is already 2–3x what a bank pays on deposits. You can't lend at less than your own cost of money.
3. Default reserves — the loss column
Industry defaults run 12–22% of advances depending on credit quality mix. On a healthy A-paper book, defaults sit around 8–12%. On a D-paper book (low FICO, short tenure, high-risk industries), defaults can hit 25–30%.
Funders reserve roughly $1,500–$3,000 per $50K deal for expected losses. That reserve gets bigger for riskier merchants — which is exactly why a 540 FICO restaurant pays a 1.42 factor while a 720 FICO HVAC contractor pays 1.22.
4. Servicing, collections, tech, overhead
ACH processing fees, bank statement parsing software, underwriter salaries, customer service, collections (often outsourced at 25–40% of recovered amounts), legal, and SaaS tooling run roughly $1,000–$2,000 per $50K deal across the term.
The bottom line per $50K deal
- Gross fee:
$15,000 - ISO commission:
−$5,500(midpoint) - Cost of capital:
−$2,500 - Default reserve:
−$2,250 - Servicing/overhead:
−$1,500 - Net pre-tax:
~$3,250(about 6.5% of funded principal)
That's a healthy but not extraordinary margin. Direct-lender economics get more interesting on renewals.
The renewal multiplier — why funders push so hard
Here's why your account manager calls you at month 6 asking if you "want more capital." Renewal economics flip the P&L.
- ISO commission drops or disappears. Most ISO contracts pay only 2–4 points on renewals, sometimes zero if the funder claims the relationship.
- Default reserve shrinks. A merchant who paid down 75% of a first deal without missing ACHs is much less risky than a first-time applicant. Reserves drop from $2,250 to $750.
- No acquisition cost. No bank statement re-pull, no thick underwriting file, no compliance re-screen. Servicing cost stays roughly flat.
On the same $50K renewal at 1.30 factor: gross fee $15,000, ISO commission $1,000, capital cost $2,500, default reserve $750, servicing $1,500. Net pre-tax: $9,250 — nearly 3x the first-deal margin.
This is also why merchants get the most aggressive renewal pricing on their second and third deals. The funder has room to drop the factor 5–10 points and still earn more on the renewal than they did on the original. The ones who don't drop the factor are counting on you not realizing the unit economics shifted.
Why ISO-free funders quote lower factors
Square Capital, Toast Capital, PayPal Working Capital, and Shopify Capital all skip the ISO channel entirely — they only fund merchants already on their platform. That removes the single biggest cost bucket from the P&L.
On a $50K deal, removing the $5,500 ISO commission frees up roughly 11 points of factor headroom. That's why Square Capital quotes 1.10–1.18 factors and a comparable ISO-channel funder quotes 1.28–1.38. Same merchant, same risk, but the cost structure is fundamentally different.
The tradeoff: you have to be processing meaningful volume through Square, Toast, PayPal, or Shopify. They're also more likely to lock you in (the daily holdback comes off your processor batches, not your bank account), and their renewal flexibility is often worse. But for merchants who fit the platform model, it's nearly always the cheaper path.
What this means for negotiation
Three concrete moves once you know the P&L:
- Always ask the funder directly what they paid the ISO. Most won't tell you, but the question alone signals you understand the structure. Some will trim a point or two off the factor to keep you happy.
- On renewals, push for at least 3 points of factor reduction. The funder's marginal cost has dropped — they have the room. If they refuse, get a competing quote from a direct-to-merchant funder.
- Apply directly to 2–3 funders, then bring quotes to an ISO last. ISOs beat their best direct quote far more often than not — but only if you have a real one to beat.
Frequently asked questions
- Why are MCA factors so much higher than bank loan rates?
- Three reasons: capital cost (MCA funders borrow at 8–12% themselves, not the 4% banks pay depositors), default rates (12–22% of MCAs default vs ~3% of bank business loans), and broker commissions (12–18 points paid to ISOs before the funder sees a dime). Strip those three out and the factor would land closer to a bank rate.
- How much does an ISO broker actually make on my deal?
- Standard ISO commission in 2026 is 8–15 points on the funded amount, paid by the funder out of the factor. On a $50,000 MCA at a 1.30 factor, the ISO typically nets $4,000–$7,500. Some ISOs add a 'broker fee' or 'PSF' (processing fee) on top — that's where the predatory layer lives. Always ask the funder directly what they paid the ISO.
- What's a funder's actual margin per deal?
- Industry medians: on a $50K advance at 1.30 factor (~$15K fee), the funder pays roughly $5K to the ISO, $2K cost-of-capital interest over the term, $1.5K servicing and collections cost, and reserves $2.5K for default loss. Net pre-tax: ~$4K, or 8% of funded principal. Renewal deals run double or triple that margin because the ISO commission drops.
- Why do funders push renewals so hard?
- Renewal margins are 2–3x first-deal margins because the ISO commission either disappears or shrinks dramatically (no new acquisition cost), and the funder already knows the merchant's repayment behavior (lower default reserve needed). A merchant who renews three times is worth 5–8x what a single-deal merchant is worth in lifetime contribution.
- Do funders make money on defaults?
- No — defaults are pure loss. Industry data shows the average default loses the funder 60–85% of the funded amount even after collections. The high factor rates on healthy merchants are subsidizing the losses on the 12–22% that default. This is also why funders chase confessions of judgment and personal guarantees so aggressively.
- Is there any funder type with cleaner economics?
- Direct-to-merchant funders (no ISO channel) like Square Capital, Toast Capital, PayPal Working Capital, and Shopify Capital run materially cleaner. They skip the 10–15 point ISO commission and pass some of that back as a lower factor (typically 1.08–1.20 vs 1.25–1.45 for ISO-channel). The catch is platform lock-in — you have to be processing payments through them.