The factor rate looked like a number. The annual percentage rate looks like a statute violation. The distinction between the two is the distance between what you were told and what you were charged.
Usury laws set a maximum interest rate that a lender can charge. The specific cap varies by state. In New York, civil usury is capped at 16% per annum for most transactions. Criminal usury is capped at 25% per annum. A loan that exceeds the criminal usury threshold is void and unenforceable as a matter of law. Not voidable — void. The contract is treated as if it never existed. The distinction is not academic. A void contract extinguishes the obligation to repay. A voidable contract might be enforced under certain circumstances. Void is absolute.
MCA companies argue that usury laws do not apply because the transaction is a purchase of future receivables, not a loan. When a court recharacterizes the MCA as a loan — because the funder bore no genuine risk of loss — the effective interest rate is calculated. That calculation is where the numbers become devastating for the funder.
The Math
A $50,000 advance with a factor rate of 1.40 means you repay $70,000. The factor rate makes the cost look like 40% — expensive but perhaps manageable for a short-term product. But the factor rate is not an interest rate. It does not account for the time value of the payments.
If the repayment term is six months through daily ACH withdrawals, you are returning principal and the funder’s profit every business day. The funder receives the use of the returned capital throughout the repayment period. By the midpoint of the term, you have returned a significant portion of the principal, but the total repayment amount has not decreased. You are paying the same total regardless of how quickly the principal is returned.
When calculated using standard APR methodology — the methodology required for loans under truth-in-lending regulations — the effective annual percentage rate on this transaction is not 40%. It is not 80%. Depending on the specific terms, it may be 150%, 200%, or higher. Some MCAs, when the math is done properly, produce effective APRs in excess of 300%.
These rates exceed the usury cap in every state that has one. They exceed the criminal usury threshold in New York by a factor of six or more. They exceed the civil usury threshold in most states by an even wider margin.