APR (Annual Percentage Rate)

What APR actually measures

APR answers one question: if you hold this money for a year, what does it cost as a percentage? It is deliberately standardized, and that is the whole point. A five-year equipment loan, a revolving line, and a six-month advance all get expressed on one scale so you can put them next to each other.

Two things separate APR from a headline rate. It folds in most fees rather than interest alone, and it accounts for the fact that you are paying the balance down as you go. If you take $50,000 and repay it over six months, you do not have $50,000 for six months — on average you have roughly half of it. APR reflects that. A simple “cost divided by amount funded” calculation does not.

Turning a factor rate into an APR

Merchant cash advances are priced with a factor rate rather than an APR, because an advance is structured as a purchase of future receivables rather than a loan. That does not stop you from annualizing the cost yourself. Take a real deal:

• Amount funded — $50,000
• Factor rate — 1.35
• Total payback — $67,500
• Cost of the money — $17,500
• Repayment — daily ACH over roughly six months, about 126 business days at $535.71 per day

The cost is 35% of the amount funded. Stretch 35% across a calendar year and you get a simple annualized figure of about 70%, which is $17,500 ÷ $50,000 × 365/182. But that math assumes you keep the full $50,000 for the whole six months, and daily remittance means you never do. Solve instead for the rate that makes 126 daily payments of $535.71 worth $50,000 today, and the annualized cost lands near 126%.

Same deal, same $17,500, and the honest number is close to double the back-of-envelope one — purely because the balance amortizes from day one. Before you compare any two offers, put your own figures through the MCA calculator and work from total dollars repaid. Our breakdown of how MCA rates are actually quoted covers where those numbers come from.

APR and EAR are not the same number

APR takes the periodic rate and multiplies it out to a year. Effective annual rate (EAR) compounds that same periodic rate instead, so the 126% APR above becomes an EAR of roughly 251%. Neither is wrong; they answer different questions. APR is the practical tool for comparing offers, and EAR shows how sharply frequent-payment compounding bites. Shop on APR, and know EAR exists so nobody blindsides you with it.

What it means for your business

A triple-digit APR is information, not a verdict. A 126% annualized cost on $50,000 that lets you accept a $200,000 purchase order you would otherwise decline can be the best money you ever spend. The identical 126% used to cover an ongoing shortfall is how owners end up stacking advances and losing control of their deposits.

So run the test in dollars, not percentages: what does this capital produce, and does that beat the cost over the weeks you actually hold it? If you cannot answer in dollars, the rate is too high whatever it is. And while you are asking, price a business term loan or line of credit alongside it. A slower product that funds in two weeks frequently costs a fraction of one that funds in two days.

What to watch for

• An advance has no contractual APR. Any APR attached to an MCA is an estimate resting on an assumed repayment speed. If sales run hot and you finish in four months instead of six, your dollar cost stays flat while the effective APR climbs.
• Ask which fees are inside the number. An APR quoted without origination, underwriting, or per-payment ACH charges is not comparable to one that includes them. Total dollars repaid settles the argument faster than any percentage.
• Treat “1.35 is 35% interest” as a warning sign. On a six-month daily-pay schedule the annualized cost is several times that. A rep who says otherwise is either untrained or counting on you not to check.
• Faster is not automatically cheaper. Quick repayment shortens your time in debt but raises the annualized rate. Judge the two separately: total dollars for how big the cost is, APR for whether the product suits the job at all.

How do I convert a factor rate to an APR?

Start with the cost: amount funded × (factor rate − 1). On $50,000 at 1.35 that is $17,500. Divide by the amount funded for a period cost of 35%, then annualize it for the expected repayment window. Because you repay a little every business day rather than all at maturity, the true annualized figure runs close to double that simple calculation — roughly 126% in this case, not 70%.

Why is MCA APR so high compared with a bank loan?

Three reasons stack up. The cost is fixed rather than accruing, so a short repayment window concentrates it into a small number of days. Repayment is daily or weekly, so your average outstanding balance is far lower than the amount funded. And underwriting leans on deposit history rather than credit and collateral, which prices in more risk. Speed and access are what you are paying for.

Is APR the best way to compare business financing offers?

It is the best single number, but never the only one. APR normalizes offers with different terms and payment frequencies onto one scale. Read it alongside total dollars repaid, the payment amount you have to clear each week, and what happens if revenue drops. A lower APR with a payment your cash flow cannot absorb is still the wrong deal.