APR Equivalent
APR equivalent is the calculated annualized percentage rate of an MCA factor rate when expressed in traditional lending terms — required disclosure under several state commercial financing laws — providing merchants comparison capability between MCA pricing and APR-based loan products.
Why This Matters
APR equivalent calculations account for both factor rate and effective repayment timeline. A 1.30 factor MCA paid back in 6 months produces a higher APR equivalent than the same factor paid back in 12 months — total cost is fixed, but annualization changes with duration. Calculation methodologies vary; the dominant standard uses internal rate of return (IRR) calculations on actual or assumed payment schedules. Typical MCA APR equivalents range 50-150% depending on factor and term. Disclosure requirements under NY CFDL and California SB 1235 mandate APR equivalent presentation alongside factor rate to merchants, providing direct comparison to APR-based alternatives.
Example
MCA: $50K advance at 1.35 factor ($67,500 payback), daily payments over 6 months. IRR-based APR equivalent calculation: roughly 75-85% APR. Same factor over 9 months: roughly 50-60% APR. Same factor over 12 months: roughly 40-50% APR. Faster payback periods produce higher APR equivalents on identical factor rates.
Frequently Asked Questions
Frequently Asked Questions
Why does MCA APR equivalent vary so widely?
Repayment timeline drives the calculation. A short-payback (3-month) deal at 1.35 factor produces 100%+ APR equivalent. A long-payback (12-month) deal at the same 1.35 factor produces 30-50% APR equivalent. The total cost is identical, but annualization changes dramatically with duration.
How does APR equivalent affect MCA marketing?
Disclosure-required states force APR equivalent presentation in merchant-facing materials. The high APR equivalents (typically 50-150%) create competitive disadvantage versus APR-based alternatives in direct comparison. ISOs and funders emphasize cash flow alignment, speed, and accessibility advantages rather than competing on APR.