What is a factor rate?
A factor rate is a multiplier applied to your funded amount to calculate total repayment. It's expressed as a decimal — typically between 1.10 and 1.50 — and is fixed at the time of funding.
Example: $50,000 advance × 1.30 factor rate = $65,000 total repayment. The $15,000 difference is the cost of the financing.
Factor rates are most common on merchant cash advances, revenue advances, and some short-term business loans where repayment occurs over a short window (3–18 months).
What is an APR?
APR (Annual Percentage Rate) is the annualized cost of borrowing expressed as a percentage. It includes both interest and most fees, normalized to a one-year period so different products can be compared on a like basis.
For traditional installment loans, APR is straightforward: a $50,000 loan at 12% APR for 5 years has predictable monthly payments and the APR captures the true annual cost.
The conversion math
To approximate the APR equivalent of a factor-rate product:
Approximate APR = ((Factor Rate − 1) ÷ Term in Years) × 100. For a 1.30 factor over 9 months: ((1.30 − 1) ÷ 0.75) × 100 = 40% APR equivalent.
Why this matters
Factor rates can make short-term financing look cheaper than it is. A 1.20 factor on a 6-month advance equates to roughly a 40% APR — significantly more expensive than a 12-month installment loan at 20% APR, even though the 'rate' number on the factor product looks smaller.
Conversely, comparing a 30% APR line of credit to a 1.35 factor-rate advance: if the advance is repaid in 12 months, that's roughly 35% APR equivalent — fairly close. If it's repaid in 6 months, that's 70% APR equivalent.
What to ask any lender
Before signing any business financing agreement:
- What is the total dollar amount I will repay?
- What is the daily or weekly payment amount?
- What is the expected repayment term?
- Is there a prepayment discount if I pay early?
- What is the APR equivalent? (Required disclosure in CA, NY, UT, VA, and a growing list of states.)
- Are there any origination, ACH, or maintenance fees?
Bottom line
Factor rates are not a worse or better pricing model than APRs — they're just a different one, designed for short-term financing. The key is knowing how to convert between them so you can compare offers honestly.
If any lender refuses to give you a clear total-dollar-cost and APR equivalent, that's a red flag. Walk away.
Frequently Asked Questions
Are factor rates worse than APRs?
Not inherently — they're a different pricing model designed for short-term financing. What matters is the total dollar cost and effective APR equivalent. A 1.15 factor on a 12-month advance can be cheaper than a 25% APR loan over the same period.
Why do MCAs and revenue advances use factor rates instead of APRs?
Historically, because they're structured as purchases of future receivables rather than loans, they fell outside lending regulations that require APR disclosure. Recent state disclosure laws (California SB 1235, New York Commercial Finance Disclosure Law, and others) now require funders to disclose APR equivalents alongside factor rates.
Can I negotiate a factor rate?
Sometimes. Factor rates are based on your business's risk profile (revenue stability, time in business, industry, owner credit). Stronger profiles can negotiate better rates, especially on repeat advances with the same funder.