How we calculate the true APR.

1 Factor rate basics

An advance is priced by a factor, not an interest rate.

A merchant cash advance is the purchase of your future receivables at a discount. It is not a loan, so it does not carry an interest rate. Its price is a factor rate, a flat multiplier that is usually between 1.10 and 1.50.

The math is simple, and that is the point. You multiply the advance by the factor to get the total you will repay. Subtract the advance and you have the cost, which funders call the cost of capital.

Because there is no compounding, the dollar cost never changes once the contract is set. A $50,000 advance at a 1.40 factor repays $70,000, and the cost is $20,000. That $20,000 is locked in whether you finish in eight months or fourteen. Paying early does not shrink it, because the dollars are set by the factor, not by time.

2 Why the simple number understates

You repay the whole time, so your balance shrinks every day.

Brokers usually quote a simple annualized number. They take the cost, divide it by the advance, and stretch it across a year. On our canonical example that is $20,000 divided by $50,000, annualized over twelve months, which comes to a tidy 40%.

That number is real, but it understates what the money actually costs you. The reason is that you do not hold the full $50,000 for the whole term. You start repaying on day one and keep repaying every business day. By the middle of the term you are only holding a fraction of the original advance, yet you still owe the full $20,000 cost.

Think of it this way. If you only had use of the cash for half the time on average, then a cost that looks like 40% against the full amount is closer to double that against what you actually had in hand. The simple number ignores that. The true APR-equivalent does not.

3 The true APR-equivalent

We use the IRR of the actual cash-flow stream.

To get an honest annualized cost, we model the real cash flows and solve for the rate that ties them together. This is the internal rate of return, or IRR. It is the same idea regulators use when they annualize the cost of credit, applied here only so you can compare an advance to a loan or line of credit on equal footing.

Here is the method in plain words.

1. On day 0 you receive the advance. That is a positive cash flow to you.
2. Then you pay a fixed remittance every business day, or every week, until the full payback is collected. Each remittance is a negative cash flow.
3. We solve for the periodic rate that makes the present value of all those payments equal the advance you received. That rate is the IRR for one period, for example one business day.
4. We annualize it by multiplying the periodic rate by the number of periods in a year. For a business-daily schedule that is 252 business days. That product is the true APR-equivalent.

We solve for r numerically by bisection, carrying full precision through every step and rounding only at the very end for display. That is why our published numbers reproduce exactly: the same inputs always return the same result.

4 A fully worked example

Walk it through, number by number.

Here is the canonical example we use across the site. A $50,000 advance at a 1.40 factor, repaid every business day over 12 months. Every figure below is produced by the same engine the calculators run, computed live in your browser, not typed in by hand.

The takeaway is the gap. The simple 40% and the true APR-equivalent near 71% describe the same deal. One is the number that sounds easy. The other is what the money costs you once you account for repaying the whole time. We always show both, with the gap, so you can decide with your eyes open.

5 Check our math

Every calculator runs this exact method.

The numbers above are not marketing copy. They come from one shared engine that every tool on this site uses. That engine self-tests against a fixed set of reference values on each build, so a $50,000 advance at 1.40 over 12 months returns the same $70,000 payback, $277.78 daily payment, 40% simple, and 71.3% true APR-equivalent every single time.

Do not take our word for it. Put your own offer into the calculators and watch the same method work on your numbers.

Want to read more on how an advance is priced and when its speed is worth the cost? Start with our guide on the real cost of an advance, or compare an advance against a business line of credit, which is a loan quoted as an APR and often costs less over time.