The short answer: For a $50,000 need, a merchant cash advance at a 1.35 factor costs about $17,500 over roughly six months of daily payments — an equivalent APR of 125.85%. An 18% term loan over 24 months with a 3% origination fee costs about $11,408.92 all-in — an equivalent APR of 21.17%. The MCA costs $6,091.08 more for the same money. Below is the math, line by line, so you can see exactly where the difference comes from.
The MCA is almost always the more expensive option on price. The rest of this page is about understanding how much more, why, and the narrow cases where people choose it anyway.
The two offers, side by side
Same business, same $50,000 need:
| Merchant cash advance | Term loan | |
|---|---|---|
| Amount received | $50,000 | $50,000 |
| Price quoted | 1.35 factor rate | 18% APR + 3% origination fee |
| Total payback | $67,500 ($50,000 × 1.35) | $59,908.92 (24 × $2,496.21) |
| Upfront fee | $0 | $1,500 (3%, withheld from proceeds) |
| Net received | $50,000 | $48,500 |
| Total cost of capital | $17,500 | $11,408.92 |
| Equivalent APR | 125.85% (nominal) | 21.17% (all-in) |
| Repayment rhythm | ~$519/day, every business day, ~6 months | $2,496.21/month, 24 months |
Both totals were run through our Business Funding Cost Analyzer, which prices the MCA’s factor rate as an equivalent APR using the same actuarial (IRR) method federal lending disclosures use — solving for the periodic rate that zeroes the present value of the actual payment schedule. See our methodology page for the full derivation and caveats.
Why the MCA is so much more expensive
Three compounding reasons:
1. The factor is not an interest rate. A 1.35 factor means you repay $1.35 for every $1.00 received — $17,500 on top of $50,000. It is not “35% interest.” Interest is charged on the outstanding balance over time; a factor is charged on the full advance, in full, regardless of how fast you repay. (The folk formula (factor − 1) × (12 ÷ months) gives 70% for this example — shown once here so you can see how misleading it is. It assumes you hold the full $50,000 for the whole term, which you don’t.)
2. Daily repayment makes it worse, not better. MCA payments start immediately — roughly $519 every business day for six months. Each payment reduces your outstanding balance, which means the average balance you’re carrying is far less than $50,000, while the $17,500 price never shrinks. That’s the mechanism that turns a “1.35 factor” into a 125.85% equivalent APR.
3. The price is fixed even if you repay early. Most MCAs have no prepayment discount: settle at month three and you still owe the full $67,500. On the term loan, extra principal payments reduce interest dollar for dollar.
The cash-flow view
Price isn’t the only dimension. Here’s what each option demands from your cash flow:
- MCA: ~$519.23/day × 130 business days. That’s roughly $11,423/month in equivalent outflow — and it’s automatic, pulled from your account daily. A slow week doesn’t pause it.
- Term loan: $2,496.21/month. About a quarter of the monthly burden, spread over two years.
If the advance’s daily pull exceeds your average daily profit margin, the MCA doesn’t solve a cash problem — it becomes the cash problem. Many businesses that take an MCA for working capital end up taking a second one to cover the first one’s payments. That’s the renewal trap — see Merchant Cash Advance Renewals and Stacking.
When people choose the MCA anyway
Honestly, there are narrow cases:
- Speed. An MCA can fund in 24–48 hours. A term loan takes weeks; an SBA loan takes longer. If the cost of not having the money this week is larger than $6,091 (a lost contract, a shuttered week), the math can favor speed.
- Accessibility. MCAs underwrite on revenue and bank statements, not credit score and collateral. If you can’t qualify for a term loan, the MCA may be the only offer on the table — in which case the real question is whether the project it funds earns more than it costs (see How to Compare Business Loan Offers).
- Short, high-return use. Inventory you can turn in 60 days at a fat margin is the classic defensible MCA use. Even then, model it: would you still take the deal if the term stretched to six months?
What isn’t a good reason: the monthly-equivalent pitch. “$519 a day sounds manageable” is how a $17,500 price tag gets past your defenses.
Before you sign either
- Run both offers through the Business Funding Cost Analyzer with the actual factor, fees, and payment frequency. Equivalent APR is the only number that lets you compare a factor quote against an APR quote.
- Read the agreement for the five most expensive clauses: confession of judgment, blanket lien, personal guarantee, prepayment terms, and auto-renewal. The full checklist is on Business Loan Agreement Red Flags.
- Ask the funder for the estimated APR in writing. New York’s small-business finance disclosure law requires MCA providers to disclose an estimated APR; other states are following. If the funder won’t state one, you now know how to compute it — and why they won’t.
The term-estimate risk
Every MCA equivalent APR rests on an estimated term — the funder’s projection of how fast your revenue repays the advance. If revenue runs hot, you repay faster, and the true APR lands above the estimate. Our sensitivity analysis shows the scale: at a 1.35 factor, a 3-month actual repayment prices at ~250% APR versus ~126% at six months and ~63% at twelve.
This cuts both ways, and you should know both edges:
- Faster than estimated: you pay the same $17,500 for less time with the money. The advance got more expensive and nobody sent you a revised quote.
- Slower than estimated: the APR falls, but the daily pull continues longer, and some agreements add fees or trigger renewal offers when the term extends.
Ask the funder how the estimate was built — what revenue assumption, what holdback percentage — and model the APR at 70% and 130% of the estimated term before you decide.
What the funder sees vs. what you see
The funder prices risk: default rates in MCA portfolios are high, underwriting is thin, and the factor has to cover losses across the book. That’s a legitimate business — the factor isn’t a scam, it’s a price. Your job isn’t to judge the funder’s margins; it’s to decide whether your use of the money earns more than the price. A $17,500 cost that unlocks a $40,000-margin contract is a good trade. A $17,500 cost that covers payroll during a slow month — with no plan for the slow month after — is the first step into the renewal cycle (Merchant Cash Advance Renewals and Stacking).
The questions that change the answer
Before choosing between these two structures, answer three questions honestly:
- Can you qualify for the term loan? If yes, the comparison above is your decision. If no, the real comparison is the MCA against not borrowing — and “not borrowing” needs its own math (lost revenue, delayed growth, or simply waiting).
- How fast does the money come back? Capital that returns in 60 days at a strong margin can carry MCA pricing. Capital that trickles back over a year cannot — the term loan’s 24-month structure exists for exactly that case.
- What does a bad month do to each option? The term loan’s $2,496 monthly payment is painful in a bad month. The MCA’s ~$11,400/month equivalent outflow in a bad month can be fatal. Stress-test both against your worst recent month, not your average.
Run your own numbers in the Business Funding Cost Analyzer — the MCA factor quote and the term loan side by side, priced on the same basis.
Methodology note: the 125.85% figure is an equivalent APR computed from the projected payment schedule (TILA actuarial method, nominal, business-day repayment). It is not a rate the funder quoted — MCAs are generally not loans and are not subject to the same APR disclosure rules as loans. The MCA term is an estimate; actual cost depends on the real repayment schedule. See our methodology page for the full derivation and caveats.