The short answer: Normalize every offer to the same three numbers — total cost of capital (dollars out minus dollars in), equivalent APR (cost per year on comparable units), and monthly (or daily) cash-flow demand — then read the agreement for the clauses that price risk you’ll never see in a quote. An offer that looks cheaper on any single number can be the most expensive once all three are on the table.
Funders quote in at least three incompatible languages: APR loans, factor-rate advances, and flat “total payback” figures. This page is the translation guide.
The three quote languages
1. APR loans. “18% APR, 24 months, 3% origination fee.” The APR is nominal — the price of the outstanding balance per year. But the quoted APR often excludes the origination fee. The true comparison number is the all-in APR: payments on the full $50,000 with the $1,500 fee withheld, which prices to 21.17% for our standard example. Always ask whether the quoted APR includes fees. Often it doesn’t.
2. Factor-rate advances. “1.35 factor, ~6 months, daily payments.” The payback is simple — $50,000 × 1.35 = $67,500. The cost is simple — $17,500. But there is no APR in the quote at all, which makes it uncomparable to a loan until you compute one. Our What Is a Factor Rate? guide walks through the translation: 125.85% equivalent APR (nominal), for this example.
3. “Total payback” quotes. “Pay back $67,500 over six months.” Common from MCAs and some online lenders. Useful — it at least states the total — but it hides the cost of capital ($17,500 here) behind the gross figure, and it hides the equivalent rate entirely.
The comparison framework
For each offer, fill in this table. Refuse to compare until all rows are complete:
| Offer A | Offer B | |
|---|---|---|
| Net dollars received (after withheld fees) | ||
| Total dollars paid back | ||
| Total cost of capital (paid − received) | ||
| Payment amount and frequency | ||
| Equivalent APR (nominal, all-in) | ||
| Prepayment terms | ||
| Collateral / lien scope | ||
| Personal guarantee? | ||
| Renewal / evergreen clauses? |
Run the numbers in the Business Funding Cost Analyzer — it takes MCA and term-loan inputs and prices both on the same basis, so Offer A (factor) and Offer B (APR) land in the same table automatically.
The worked example
Our anchor comparison, repeated here so the method is visible:
- MCA: $50,000 at 1.35 factor, ~6 months daily → total payback $67,500, cost $17,500, equivalent APR 125.85%, cash demand ~$519/day.
- Term loan: $50,000 at 18% APR, 24 months, 3% fee → total paid $59,908.92, cost $11,408.92, all-in APR 21.17%, cash demand $2,496.21/month.
- Verdict: the MCA costs $6,091.08 more and demands roughly four times the monthly cash flow. Unless speed or accessibility forces the choice (see Merchant Cash Advance vs. Term Loan), the term loan wins on every row.
Questions to ask every lender
- What is the total payback, in dollars? Get the gross number in writing.
- What fees are withheld from or added to the advance? Origination, closing, packaging, “underwriting” — all of it.
- Is the quoted APR nominal, and does it include fees? If they can’t answer, compute the all-in figure yourself.
- What is the payment schedule — amount and frequency? Daily, weekly, monthly. Frequency changes the true cost.
- Is there a prepayment discount? For MCAs: almost never — you owe the full payback early or late. For loans: prepayment penalties are the thing to check (SBA 7(a) prohibits lenders from charging their own prepayment penalty; a separate SBA recoupment fee applies only to >15-year loans prepaid in the first three years).
- What collateral is attached, and what is the lien scope? A blanket lien on all business assets is a different deal than a lien on the financed equipment.
- Is there a personal guarantee? If yes, your house is in the deal whether or not you noticed.
- Can the agreement renew or “evergreen” automatically? Some MCA contracts roll into a new advance at a set paydown percentage. See Merchant Cash Advance Renewals and Stacking.
- Is there a confession of judgment clause? If yes, understand exactly what it means in your state — see Business Loan Agreement Red Flags.
- What is the estimated APR, in writing? New York requires MCA providers to disclose one. Even where not required, asking forces the funder onto your comparison basis.
The traps in the fine print
- “No origination fee” with a higher factor. A 1.38 factor with no fee is the same price as 1.35 with a fee — the language just moved. Total cost of capital doesn’t care what the line items are called.
- Weekly vs. daily quotes. Two MCAs with the same factor and the same estimated term can have different true costs depending on payment frequency. Small effect, but it’s free to check.
- Rate quotes that assume a longer term. An MCA quoted against a 9-month “estimated” term that actually repays in 5 months is far more expensive than the estimate implies. The term is the funder’s guess — your revenue decides the reality.
Worked example 2: two MCAs against each other
Factor quotes can’t be compared by factor alone. Two offers for the same $50,000 need:
- Offer A: 1.30 factor, ~6 months, daily → payback $65,000, cost $15,000, equivalent APR 109.21%.
- Offer B: 1.40 factor, ~9 months, daily → payback $70,000, cost $20,000, equivalent APR 94.96% (longer term dilutes the higher factor).
Offer B costs $5,000 more in absolute dollars but less per year — and its daily payment (~$359 vs. ~$500) is gentler on cash flow. Which is “cheaper” depends on whether you optimize for total dollars or for survival. Most businesses should optimize for survival first: the advance you can’t service is infinitely expensive. This is exactly the calculation the Business Funding Cost Analyzer runs — equivalent APR and payment schedule, side by side.
The cash-flow stress test
After the price comparison, run the survivor test:
- Take the daily (or weekly/monthly) payment from each offer.
- Subtract it from your worst month’s average daily profit from the last twelve months — not the average month, the worst.
- If the result is negative for any offer, that offer fails regardless of its APR. A 21% APR you can’t pay is worse than a 126% APR you can — because the one you can’t pay triggers default clauses (Business Loan Agreement Red Flags), and default is where the real costs live.
- Now layer in seasonality: if your worst months cluster (retail January, construction winter), check whether the repayment term overlaps them.
Price decides between offers you can survive. Cash flow decides which offers those are.
Compare your actual offers in the Business Funding Cost Analyzer — paste the factor quote and the APR quote in and see both priced on the same basis.
Estimates and worked examples use the funding analyzer’s pinned method (TILA actuarial IRR, nominal). Real costs depend on the actual repayment schedule, which is an estimate for sales-based financing.