MCA Guide
Merchant Cash Advance Holdback and Factor Rates
What a 1.4 factor rate really costs once you convert it to an annual figure, what the holdback does to that number, and the math shown in full with every figure labelled illustrative.
How much does a merchant cash advance actually cost?
A merchant cash advance is priced with a factor rate, not an interest rate. A 1.4 factor rate on a $50,000 advance means $70,000 is repaid, a $20,000 cost. That looks like 40 percent, but over a short term the annualized cost is far higher.
Why a factor rate is not an interest rate
Merchant cash advance pricing is built to look cheaper than it is. Bank loans quote an interest rate that accrues on a shrinking balance over time, so the language is familiar and the cost is easy to compare. A merchant cash advance does none of that. It is priced with a factor rate: a single multiplier, usually written as something between 1.2 and 1.5, that fixes the total you repay at the moment you sign. Multiply the amount advanced by the factor rate and you have the payback. There is no interest accruing, no balance that gets cheaper as you pay it down, and, in most cases, nothing to save by clearing it early.
That single design choice does two things. It makes the price sound small, because a factor rate of 1.4 reads like a friendly number next to a double-digit interest rate. And it hides the true annual cost, because a factor rate has no time built into it. The same 1.4 can be cheap or brutal depending entirely on how fast you are made to repay it. The rest of this page shows exactly how that works, with the math on the page. Every figure below is illustrative and labelled as such.
The math, shown in full
Take an illustrative advance and follow it through. The arithmetic is simple. The lesson is not.
A 1.4 factor rate, converted to an annual cost
An illustrative $50,000 advance at a 1.4 factor rate, repaid over roughly six months. These figures are illustrative and do not represent any Ovesture offer or rate.
What the offer looks like
- Amount advanced
- $50,000
- Factor rate
- 1.4
- Total to repay
- $70,000
- Cost of capital
- $20,000
- Headline cost
- 40%
What it costs per year
- Cost of capital
- $20,000
- Term
- ~6 months
- Cost over the term
- 40%
- Simple annualized
- ~80%
- Effective annual cost
- 100%+
Illustrative only. The simple annualized figure doubles the 40 percent term cost because six months is half a year. The effective annual cost is higher again because you repay a slice every business day, so you never hold the full $50,000 for the whole term. Actual factor rates, terms and costs vary by funder and are not stated here.
The two panels use the same advance and the same factor rate. On the left, the offer as it is usually presented: borrow $50,000, repay $70,000, a cost that reads like 40 percent. On the right, the same deal expressed the way you would compare it to a bank loan. The 40 percent is the cost over roughly six months, so on the simplest annual basis it doubles to about 80 percent. And because a holdback takes a piece of your sales every business day, the average balance you actually have use of is well below $50,000 across the term, which pushes the true annualized cost into triple digits. None of that changed the factor rate. It was always 1.4.
What the holdback percentage does to the price
The holdback is the second lever, and it is the one most owners never think to ask about. It is the share of your daily or weekly sales the funder collects until the advance is cleared. On a card-split advance that might be an illustrative 10 to 20 percent of each day's takings, pulled automatically before the money reaches your account. A fixed daily debit works the same way in reverse: the fixed amount and your sales together decide how long repayment takes.
Here is the counter-intuitive part. Because the total repayment is already fixed by the factor rate, a higher holdback does not make the advance cheaper. It makes it more expensive in annual terms. Collecting a bigger slice of every sale clears the same $70,000 faster, which shortens the term, which raises the effective annual cost of the identical $20,000 fee. A holdback that feels aggressive on your cash flow is also quietly compressing the same cost into fewer months. Speed of repayment is not a discount. With a factor rate, it is the opposite.
Ask for these three numbers
Before you sign anything, get the total dollars repaid, the expected term, and the holdback percentage in writing. With those three you can work out the annual cost yourself. A funder who will quote a factor rate but not the annualized cost is relying on the gap between the two.
Why a shorter term makes the same rate more expensive
This is the point the industry would rather you missed, so it is worth seeing it laid out. The factor rate fixes the fee. The term decides what that fee is worth per year. Hold the advance and the factor rate steady, change only how long you have to repay, and the annualized cost moves a long way. The table below does exactly that with the same illustrative $50,000 advance at the same 1.4 factor rate.
| Total repaid | Cost of capital | Roughly annualized | What it means | |
|---|---|---|---|---|
| ~4 month term | $70,000 | $20,000 | ~120% | Same fee, crushed into a third of a year |
| ~6 month term | $70,000 | $20,000 | ~80% | The common mid-range, still far above any loan |
| ~12 month term | $70,000 | $20,000 | ~40% | The fee spread over a full year, but still fixed |
Read across any row and the total repaid never changes: it is $70,000 every time, because the factor rate fixed it. Only the annualized cost moves, and it moves entirely with the term. This is why a factor rate on its own tells you almost nothing about what an advance costs. A 1.4 over twelve months and a 1.4 over four months are not the same product at the same price. One is roughly three times more expensive per year than the other. Whenever a funder leads with the factor rate and stays quiet about the term, this is the number they are keeping in the shade.
A calculator could live here
A factor-rate calculator, where you enter the advance, the factor rate, and the term and see the annualized cost, would sit naturally on this page. Until then, the math above is the whole method: cost of capital divided by the amount advanced gives the term cost, and the term scaled to a year gives the annual figure.
What to do with this
Knowing the true cost is not the same as saying every advance is a mistake. Fast, unsecured funding has a real use when a short, profitable opportunity would otherwise be missed, and a factor rate is the price of that speed. The danger is using an advance, or stacking several, to cover an ongoing shortfall, because the annualized cost you have just seen then works against a business that is already stretched. If you are carrying one or more advances and the daily holdback is outrunning your revenue, the priority is to lower the cost, not to add another layer of it. The routes that actually do that, ranked by what each one costs across the full term, are set out in how to get out of a merchant cash advance.
If you want to understand the product itself before comparing prices, start with what a merchant cash advance is. To see how this pricing stacks up against the alternative most owners should weigh first, read merchant cash advance versus a business loan. And if the advances you already hold are the problem, the full set of routes out, including the ones we do not sell, is on our MCA debt relief hub.
This page is general educational information about merchant cash advance pricing and is not financial or legal advice. Every dollar figure, factor rate, holdback percentage and annualized cost shown here is illustrative and does not represent any Ovesture product, rate or offer. Actual terms vary by funder, by state and by the specific agreement you sign. Request every figure in writing and, if you are in default or facing collection, consult a licensed attorney.
Frequently asked questions
A factor rate is a single multiplier, usually written as something like 1.2 to 1.5, that fixes the total you repay at the moment you sign. You multiply the amount advanced by the factor rate to get the payback. It is not an interest rate and it does not shrink over time, so 1.4 on a $50,000 advance means $70,000 is owed whether you clear it in four months or twelve. Every figure here is illustrative.
You cannot do it exactly without the term, and that is the whole trick. Start with the cost of capital as a share of the amount advanced. A 1.4 factor rate costs $20,000 on a $50,000 advance, which is 40 percent of what you borrowed. That 40 percent is the cost over the whole term, not per year. Divide the term into a year and the annualized figure climbs sharply. Spread over six months it is roughly 80 percent on a simple basis, and higher still once you account for paying it down daily. These numbers are illustrative.
The holdback is the share of your daily or weekly sales the funder collects until the advance is repaid. On a card-split advance it might be an illustrative 10 to 20 percent of each day's takings. A higher holdback clears the balance faster, which shortens the term and, because the total repayment is already fixed by the factor rate, pushes the effective annual cost up rather than down.
The headline cost is the cost of capital: the amount advanced multiplied by the factor rate, minus the amount advanced. On an illustrative $50,000 advance at a 1.4 factor rate that is $20,000. The real cost, in the terms you would compare against a loan, is the annualized rate, which is far higher than the headline because the term is short. Ask any funder for the total dollars repaid, the term, and the holdback before you sign.
No, and treating them as the same is where owners get caught. Interest accrues on a balance over time, so paying early saves money. A factor rate fixes the total upfront, so paying early usually saves nothing unless the funder agrees to a discounted payoff in writing. A 1.4 factor rate is not a 40 percent loan. Converted to an annual rate it is often well into triple digits.
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