While it’s easier and faster to get approved for a business cash advance than a traditional business loan, it’s also much more expensive. Providers charge very high business cash advance rates, as much as 45% or more, to account for the risky transaction.

Determining business cash advance costs

Three criteria determine how much you’ll pay:

• Advance amount – How much cash you’ll receive
• Factor rate – The provider’s fee
• Daily retrieval rate – The daily percentage withheld from your credit card processing

The advance amount is based on your average credit card receipts over the previous six months. Depending on your credit history and business strength, a provider can advance you between 80% and 125% of the monthly average. 

The factor rate is how much the provider charges to advance you the money, typically 20% to 45% of the advance. Most businesses pay between 30% and 35%, but that rate varies depending on your credit rating and business health. Although uncommon, providers can charge factor rates as high as 50% to 75% or more, depending on how risky they consider your business.

Based on the amount you owe and your typical daily credit card sales, the provider will set a daily retrieval rate, which is the percentage they take when you process your credit card transactions. This rate, which ranges from 15% to 25% per day, determines how long it will take you to repay the advance.

Providers typically want to get their money back within six months. However, since there’s no fixed timetable for repayment, providers can negotiate the daily retrieval rate to leave you with a comfortable cash flow to run your business.

Business cash advance rate example
Here's an example of a $20,000 advance with a factor rate of 30% and a daily retrieval rate of 20%:

Advance amount requested	$20,000
Provider fee ($20,000 x 30%)	$6,000
Total repayment	$26,000
Average daily net credit card processing	$3,000
Provider's daily take ($3,000 x 20%)	$600
Repayment timeframe ($26,000 / $600)	43 1/3 days

Note that this still leaves you with a daily net of $2,400 from credit card transactions, allowing you to continue your day-to-day operations.

If your business exceeds expectations, the provider may increase the daily rate to pay off the debt sooner. In contrast, the provider can drop your rate if you experience a sales slump so you don’t struggle during lean periods.

Contracts
Make sure to review the contract terms carefully before signing anything. Check the fine print to understand what your obligations are and what services the provider offers. If the contract contradicts information shared during the negotiations, the provider should offer an explanation and agree to make changes as necessary. Also, look out for additional charges like application or processing fees, which are not typically part of this type of transaction.