The Factor Rate Is the Engine, Not the Entire Machine
Every merchant cash advance transaction begins with a factor rate, and most merchants focus on that number as the total cost of the transaction. It is not. The factor rate determines the gross repayment obligation. What arrives in your account, and what is taken from you beyond what the factor rate implies, are governed by additional mechanisms that most funders do not explain at the point of sale.
The six revenue streams described below operate in combination. In some transactions only two or three are present. In others, all six function simultaneously. The presence of multiple streams does not make an advance illegal. But it does make the true cost substantially higher than the factor rate alone would suggest.
The Factor Rate Itself: Fixed Cost That Does Not Forgive Early Payment
A factor rate of 1.38 applied to a $100,000 advance produces a total repayment obligation of $138,000. That obligation does not decrease if you repay in three months instead of nine. The full $38,000 is owed regardless of repayment speed. This is the feature that distinguishes MCAs from interest-bearing instruments and that courts have repeatedly examined when asked whether a given advance is a purchase agreement or a disguised loan.
From the funder’s perspective, the fixed-cost structure is the most efficient revenue model in commercial lending. There is no prepayment benefit to the merchant, no amortization schedule, and no reduction in cost associated with faster collections. The funder captures the same return whether the merchant’s revenue is strong or whether collections drag across two years.
Origination and Underwriting Fees
Before a merchant sees any funds, the funder deducts an origination or underwriting fee from the advance. The range across the industry runs from 1% to 5% of the funded amount, and in some programs the fee reaches $2,000 to $3,000 as a flat charge. These fees are deducted before disbursement, which means a merchant who accepted a $100,000 advance may receive $96,000 while owing the repayment obligation calculated against the full $100,000.
The terminology for this fee varies across contracts. Some funders call it an origination fee. Others label it an administrative charge, a processing fee, or a closing cost. The variation is not purely cosmetic. It creates ambiguity that benefits the party imposing the charge, and it has been a feature of MCA litigation in the Southern District of New York where courts have had to interpret how deductions affect the economics of the transaction.
Broker Commission Markup in the Factor Rate
The broker does not charge you a commission line item. The commission is already inside the factor rate you accepted. You will never see a document that labels it as such.
Funders provide ISO brokers with a rate floor and permit markups within a defined band. The broker presents the merchant with a factor rate above the floor, retains the spread as compensation, and closes the transaction. Commissions structured this way have been reported at levels reaching 15 points of the funded amount. The merchant pays the commission across every collection cycle, invisibly, as an element of the factor rate.
Stacking: Multiple Positions, Multiple Revenue Events
Stacking occurs when a merchant holds more than one active MCA position. Each new position generates a separate factor rate, a separate origination fee, and potentially a separate broker commission. A funder who places a second advance on a merchant already servicing a first position collects on both simultaneously through the same daily or weekly bank debit. Where a broker arranges both positions, commissions are generated twice.
Some ISO agreements prohibit stacking because it degrades the quality of the funder’s first position. Others permit or encourage it. The FTC’s October 2023 enforcement action against an MCA operator cited stacking and undisclosed fee practices as part of the conduct that resulted in a permanent ban. Stacking is not uniformly predatory, but it substantially increases a merchant’s total debt service, and the practice has drawn regulatory attention in part because its effects are rarely explained clearly to the merchant before they accept a second position.
Renewal Commissions on Refinanced Positions
When a merchant reaches approximately 50% of repayment on an existing advance, brokers frequently approach them with renewal offers. The pitch is straightforward: retire the existing balance and access additional capital. What the pitch omits is that the renewal generates a new origination event, a new factor rate applied to the new funded amount, and a new commission for the broker. The merchant who believed they were reducing their debt service may instead be extending it and compounding its total cost.
Renewal cycles are a meaningful revenue source for both funders and brokers. A merchant who renews two or three times over eighteen months may repay several times the original advance amount in aggregate, across overlapping obligations that each began with a term sheet that made the individual transaction appear manageable.
Default Fees and Confession of Judgment Executions
MCA agreements typically specify default triggers that are broader than simple non-payment. A merchant who changes bank accounts, opens a second account, or reduces collections below a threshold may be in technical default. Default provisions commonly impose additional fees, accelerate the full balance, and authorize the funder to execute a confession of judgment. In states that permit confessed judgments, this can result in a lien or bank levy without prior court hearing.
The New York Attorney General’s February 2024 judgment against Richmond Capital Group, Ram Capital Funding, and Viceroy Capital Funding arose in part from allegations that these funders had fraudulently secured confessed judgments and imposed excessive charges against merchants who disputed their accounts. Default mechanisms are the final revenue stream in the MCA model, and they operate most aggressively against merchants who are least able to respond. Whether any particular default charge is enforceable depends on the jurisdiction and the specific facts of the transaction.
If you are carrying one or more MCA positions and the total repayment obligation seems disconnected from what you were told at closing, that gap is worth examining. Consultation is where this conversation begins.
