The real cost of 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 ratelike “1.3” or “32% 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 actually 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. 10% means every R1,000 of daily takings, R100 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/month in card turnover.

• 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
• Effective cost: R50,000 / R200,000 over 21 months ≈ 14.3% total, or approximately 14.3% ÷ 1.75 years ≈ 8.2% per annum, simple

But that’s simpleinterest. The equivalent APR (compound, how a bank quotes) is more like 15-16% because you’re not paying the principal down monthly — the deduction services both principal and fee at once.

The critical trick — shorter payback = 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 / R200,000 over 12 months ≈ 25% APR simple, or roughly 27-28% compound.

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 is fixed total cost at origination.

When MCA actually 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) — 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 (sub-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 expected turnover boost won't come quickly
• You're tempted to stack MCAs — second advances while still paying off the first compound the cost fast and lenders hate 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 thatto the interest+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 the MCA is 10-15 percentage points cheaper because you can’t qualify for the term loan — it’s a legit bridge.

Run it through Frank

Frank’s questionnaire captures the revenue, margin, and use-case questions that determine whether MCA is the right tool — and compares it against the cheaper alternatives you might actually qualify for: See your funding options.

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