Work out what the advance costs in money, then decide

Ask a broker what an advance costs and you will get a factor. A factor is a multiplier. It tells you the ratio between two numbers and nothing about how long you have to produce the larger one, which is the part that decides whether your business survives it. Here is the arithmetic that does tell you.

The four numbers you need

1. Cash actually received. The wire that lands, after every fee withheld at closing. Not the "approved amount".
2. Total you will deliver. The purchased amount, plus every fee charged during the deal — per-debit ACH charges, monthly program or servicing fees, anything else on the schedule.
3. The remittance and its frequency. The dollar figure and whether it is daily, weekly, or something else.
4. The number of periods that implies. Total to deliver, divided by the remittance. Then convert to calendar time: daily deals typically bill on business days, so about 21 or 22 a month.

If a broker will not give you all four in writing, you do not have an offer. You have a conversation.

Do the subtraction

Illustrative only — suppose the purchased amount is $67,500, the purchase price is $50,000, a 3% origination fee of $1,500 is withheld at closing so $48,500 is wired, and a $25 fee applies to each of the 105 daily debits.

• Cash received: $48,500
• Total delivered: $67,500 plus $2,625 in per-debit fees, so $70,125
• Cost in dollars: $21,625
• Cost per dollar received: about 44.6 cents
• Daily remittance: $642.86, plus the $25 fee, so $667.86 leaves the account each business day
• Duration: 105 business days, roughly five months

Illustrative only — in that example the factor reads 1.35, while the actual cost is 44.6% of the cash you received, produced in five months. Those are not the same sentence, and only one of them is useful.

Then put time on it

Cost in dollars answers "how much". It does not answer "how much for how long", and two deals with identical dollar costs can be nothing alike.

Continuing the illustration: that same $17,500 of stated cost delivered over 105 business days puts $642.86 a day of pressure on the business. Stretched over 378 business days — about eighteen months — it is $178.57 a day. Same cost, same factor, and one of them is survivable at a margin the other is not.

The useful move is to express it per month of use. In the five-month version you are paying roughly $4,325 a month for the use of $48,500. In the eighteen-month version, roughly $1,200. Set that monthly number against your actual monthly gross profit, not revenue. If it eats a quarter of your gross profit, you are not financing growth, you are transferring it.

Cost against the money you keep

Two adjustments people forget.

Comparing two offers

Build the same four lines for each and compare in this order:

• Cash to hand. Which one actually funds the thing you need funded?
• Total dollars out. The whole cost, fees included.
• Dollars per month of pressure. Remittance times periods per month.
• Duration. How long the pressure lasts.

A deal with a higher total cost and a longer duration can be the safer deal. A deal with a lower factor and a brutal daily can be the one that closes the business. Rank on the third and fourth lines when cash flow is tight, and on the second when it is not.

Where an annualised number fits

You can convert this into an annualised rate, but only by fixing the term and saying so out loud in the same breath. An advance has no contractual term, so any annualised figure is a statement about an assumption, not about the product.

Illustrative only — take the $50,000 advanced, the $67,500 purchased amount, and assume the whole thing is delivered in equal daily amounts over exactly 105 business days. On that assumed term, the annualised rate works out to roughly 157%. Change the assumption to 378 business days and, on the same dollars, it is roughly 44%. Neither number is "the APR of the advance". Each is the APR of one assumed term, and the assumption is doing most of the work.

Run it against gross profit, not revenue

The affordability test is the one that decides whether the deal is survivable, and it takes two minutes.

Now lay the advance from the earlier example against that. The daily outflow is $667.86 across roughly 21 business days, which is $14,025 a month leaving the account. Against $15,000 of operating profit, that leaves $975 a month for the owner, for tax, for a bad week, and for anything unexpected.

Note what that number is: it is the whole remittance, not the cost portion. Affordability is tested against the outflow, because the outflow is what has to clear. The cost portion matters for deciding whether the deal is good value; the outflow decides whether the business reaches the end of it.

If the outflow takes more than about half of operating profit, the deal only works if the money it funds produces new profit inside the repayment window. Write down what that new profit is and when it arrives. If you cannot, the advance is being repaid out of the profit you already had.

What the second advance does to that arithmetic

Stacking is where this goes wrong fastest, and the reason is visible in the same numbers.

A second advance does not add its remittance to a business with $15,000 of operating profit. It adds it to a business with $975. Two daily debits against one settlement stream means the second one is being paid out of the buffer, and when the buffer runs out the debits start bouncing — at which point you are paying NSF fees on both, and both agreements have a default clause that the returned payment triggers.

The test before taking a second is the same test as the first, run on what is actually left: current operating profit minus the existing remittance, against the new remittance. If that number is negative, no term improves it.

The last check

Before signing, write down one sentence: "I will hand over $X per business day for about Y months, on top of everything else I owe." Read it against last month's bank statement. If the sentence is not obviously affordable on a bad month rather than a good one, the factor was never the problem.