The real cost of a merchant cash advance in SA: factor rate vs APR

Merchant cash advance (MCA) quotes in SA almost never come with an interest rate on the offer sheet. Instead, you get a factor rate like “1.3” (a fee of 30% of the advance), and a “daily deduction” or “holdback percentage”. This makes it almost impossible to compare to a bank term loan without doing the maths yourself. Here’s how.

What the numbers mean

Factor rate: the total amount you owe, expressed as a multiple of the advance. 1.3 means if you take R100,000, you’ll repay R130,000 in total; the R30,000 is the lender’s fee.

Holdback / daily deduction: the percentage of each day’s turnover that goes to servicing the advance until it’s paid off. At 10%, R100 of every R1,000 of daily takings goes to the lender.

Worked example

You take an R200,000 advance at a 1.25 factor rate with 12% holdback. Your business does R100,000 a month in card turnover. (Factor rates vary by lender and by business; the ones on Frank’s panel are listed on the working capital page.)

• Total you’ll repay: R200,000 × 1.25 = R250,000 (the R50,000 is the lender’s fee)
• Your monthly repayment: 12% × R100,000 = R12,000
• Time to pay off: R250,000 ÷ R12,000 ≈ 21 months
• Fee as a share of the advance: R50,000 ÷ R200,000 = 25% over 21 months, or about 14% a year spread evenly (simple)

That simple figure flatters the advance. Every deduction pays down part of what you owe, so on average you have only about half the R200,000 for those 21 months, while the R50,000 fee is charged on all of it. Worked out as an annual rate on the balance actually outstanding, the way a bank quotes a loan, the cost is about 26% a year (about 29% effective annual rate).

The critical trick: shorter payback means a higher APR

If your turnover is stronger than expected and you pay it off in 12 months instead of 21, the factor rate doesn’t change: you still paid R50,000 for R200,000. But the effective APR shoots up because you paid the fee over a shorter period.

R50,000 on R200,000 repaid over 12 months is 25% a year simple, but about 43% a year on the outstanding balance (about 53% effective annual rate).

This is the counter-intuitive thing about MCA: paying it off fast makes it more expensive, not cheaper (unlike a term loan with early settlement). That’s because there’s no early-settlement discount: the factor rate fixes the total cost on day one.

When MCA makes sense

• You need money fast (within days) and a cheaper bank loan would take 6 weeks
• You can’t service a fixed monthly instalment because revenue is seasonal
• Your margins are high enough (30%+) to absorb a 10–15% slice on every sale
• You’re using the cash for something that will lift sales quickly (stock, marketing), so the uplift covers the cost
• You don’t qualify for cheaper debt yet (short trading history, thin credit file)

When it doesn’t make sense

• Margins are thin (under 20%): the daily slice eats most of your profit on every sale
• You’d qualify for a term loan or invoice finance at half the cost
• The funding is for something slow-burning (property improvements, R&D): the turnover boost won’t come quickly
• You’re tempted to stack MCAs: a second advance while still paying off the first compounds the cost fast, and lenders dislike stacking

Before you sign, calculate the total cost.

Every MCA offer should give you the total repayment amount, the holdback percentage, and your expected payback window given your turnover. Compute:

Total fee ÷ Advance = effective cost over the payback period

Compare that to the interest and fees on a term loan over the same period. If the term loan is within 3–4 percentage points of the MCA total cost, take the term loan; the predictable fixed instalment is worth it. If you can’t qualify for the term loan at all, the MCA can be a fair bridge, as long as its cost fits inside your margins.

Run it through Frank.

Give Frank one set of answers, about a minute, and it shows whether an advance is the right tool for your business, next to the alternatives you may qualify for: See your funding options.