Effective Cost of Capital
Effective cost of capital is the all-in cost a merchant pays for MCA funding — including factor-rate payback, origination fees, processing fees, and any other charges — expressed as a percentage of net funded amount and annualized to enable comparison across financing products.
Why This Matters
Effective cost calculation requires capturing all charges, not just headline factor rate. A $50K advance at 1.30 factor with $1,500 origination fee, $200 wire fee, and $300 ACH setup fee has total payback of $65,000 against $48,000 net funded — producing 35.4% pure payback ratio. Annualized over a 6-month repayment timeframe, effective cost approaches 70%+. Comparing to a 12% bank loan APR requires careful normalization. Most state commercial finance disclosure laws require effective cost calculation in standardized format precisely to enable cross-product comparison merchants couldn't perform on factor-rate alone.
Frequently Asked Questions
Frequently Asked Questions
How is MCA effective cost of capital different from APR?
APR is the standardized annualized cost calculation used in lending. Effective cost is broader — capturing all charges and the actual money paid versus money received. For MCA, effective cost is typically expressed as APR-equivalent for comparison purposes, but the calculation is more complex than fixed-payment loan APR.
What fees should merchants include in MCA effective cost analysis?
Factor rate payback (the largest component), origination fee (typically 2-5% of advance), wire transfer fee ($25-$200), ACH setup fee ($50-$300), monthly processing fees (if applicable), and any other documented charges. Calculate against net funded amount (advance minus origination fee).