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Is American Express Merchant Financing a Good Deal?

Is American Express Merchant Financing a Good Deal?

Disclaimer, I’m not affiliated with American Express in any way. Their financing program has its pros and cons. It may or may not fit your needs. The purpose of this article is to help our audience understand the pricing science and math behind their program. I’m not endorsing or recommending against the program.

How It Works

Over the last 6 months, I have received several letters from the American Express Merchant Financing program offering to lend me $2M for a fixed fee as low as 3.5% and no APR. As a business owner, I am used to receiving an abundance of offers advertising hundreds of different types of services and products. This one was no different; I tossed it into the recycling bin. Moments after I dropped it into the deep blue recycling bin in the post office, I remembered that one of my clients may actually benefit from a short term loan to purchase his investment property.

So, I went back to the office and I immediately looked up the program. At the time of this writing, this is how it works. The borrower requests a fixed amount of funds, which will then be transferred to your bank account via ACH within 1 to 2 days. After that, AMEX will withdraw a small amount from your bank account on a daily basis, for up to the fixed term– whether it’s for six/twelve/twenty-four months.


Let’s walk through a specific example. Let’s say you borrowed $10,000 on day 0 and American Express Merchant Financing quoted you 6% fixed fee with 0% APR. From day 1 to day 365, $29.03 will be automatically withdrawn daily from your bank account to pay back your loan. If you do the math, 365 times $29.03 is roughly to $10,600, which means you paid $600 in fees. According to AMEX, the $600 is exactly 6% of $10,000 and the loan cost you 6% in fixed fee. This is exactly as they’ve advertised. 6% in today’s business financing is pretty good, isn’t it?

WRONG. As a savvy real estate investor and business owner, I immediately spotted this as a loan that is much more expensive than just 6%. After I crunched some numbers, it turned out to be equivalent to a $10,000 loan amortized over 365 days with yearly interest of a whopping 11.73%. Wait…what about the math we just did? Wasn’t it a 6% fixed fee loan? It only cost us $600 (or 6% of $10,000) in fees after all. What’s going on?

Let me reveal the trick. Let’s imagine a $10,000 loan with 6% straight interest due at the end of the year. You will have $10,000 in your bank for 365 days and you will pay back $10,600 at the very last day. Compare this loan with the American Express Merchant Financing, which one would you rather have? Of course, you’d prefer this program. In this program, you have $10,000 in your bank for 365 days. Versus in the AMEX program, you have $10,000 in your bank for only 1 day. Yes. 1 Day. At the end of day 1, you need to pay back $29.03 and your bank account will only have $9,970.96 on day 2, and another $29.03 less for day 3, so on and so forth.

To help illustrate the problem, let’s do an anatomy to AMEX’s payment schedule, as illustrated in the table below.


.. for the length of this post, I omit the rows in between and just show you what happens towards the end.


On day 1, you have a loan balance of $10,000, out of the $29.03 payment you make, $3.20 goes towards the interest of the current loan balance ($10,000). That’s a daily interest of $3.20 / $10,000 = 0.032%. The remaining $25.83 will serve as principal payment. On day 2, your loan balance becomes $9,974.17. Then you pay 0.032% interest on the new balance, so another $3.19 goes to interest and another $25.84 goes to principal. On day 3, your balance is even lower, at $9,948.34. And your interest goes down to 0.032% x $9,948.33 = $3.18. As your loan balance goes down daily, your interest also goes down.

On the last day, day 365, your loan balance is only $29.02 and the last $29.02 payment completely pays it off. Do you notice this payment schedule exactly matches American Express Merchant Financing’s payment schedule?  See the screenshot below.

Merchant Financing Sample Calculation
American Express Merchant Financing Program Sample Calculation

What’s the Equivalent Interest Rate?

Now let’s take a look at the 0.32% daily interest rate. If you multiple 0.032% by 365, you will get a yearly interest of 11.68%. In other words, if you get a 6% fixed rate loan from AMEX and pay according to their payment schedule, you are effectively paying off a $10,000 loan daily, with 11.68% / year interest rate, with payment amortized over 365 days.

When I think about it more, the real smart trick AMEX did here is, comparing $29.03 with $10,000, $29.03 is negligible. A lot of consumers who need the $10,000 tomorrow don’t really mind $29.03 being taken away the next day. What matters to them is they have $10,000 tomorrow. That’s exactly how AMEX makes money off from consumers. They lend you $10,000 for one day. The next day, they can start investing the $29.03 you pay back to them on day 2. AMEX can borrow a true 6% interest loan from somewhere else and lend you this 6% fixed fee loan and make a lot of money by manipulating the payment schedule and amortization.


We maintain a neutral position about the AMEX Merchant Financing program. The ease of approval and the amount they provide may solve the whole world’s problem for one business owner. However, if you are looking for less expensive financing, this program may not be as cheap as it sounds on paper.

The Cal Agents Realty applies the concept of amortization every day to calculate the mortgage monthly payment for our clients. After wall, what AMEX did was essentially the same as how a mortgage lender chops a million dollar mortgage into 360 equal payments for borrower to pay back every month.

If you are a real estate investor or small business owner in need of sound investment advice, feel free to contact us. I’m sure our background in finance and CPA can stretch your investment dollars better than any other real estate agents.

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Lex Shan

Lex is a real estate broker, real estate developer, entrepreneur and technologist. He has started an architectural design firm, real estate development private equity fund and California's largest real estate 3D marketing company.

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