Factor Rate vs APR: How to Compare Business Financing Costs

A funding offer that says "factor rate 1.30" sounds cheap: 30 cents per dollar. But a factor rate isn't an interest rate, and the same 1.30 can mean an annualized cost of about 37% or more than 200% depending on how fast you repay. This guide shows how factor rates work, how to turn one into an estimated APR, what some states now require providers to disclose, and how to compare an advance with a loan on total cost, APR and cash flow.

What a factor rate is

A factor rate is a multiplier applied once to the amount you receive. Multiply the amount funded by the factor rate to get the total you'll repay:

• $50,000 × 1.30 = $65,000 total payback.
• The cost of the money is $15,000, fixed on day one.
• Repaid over 126 business days (about six months), that's $515.87 every business day.

Factor rates are common on merchant cash advances (MCAs) and some short-term business loans. With an MCA, the provider is usually buying a share of your future receipts and collects through a holdback, a percentage of your daily card or bank deposits, or through a fixed daily or weekly debit.

Why a factor rate isn't an interest rate

Interest accrues on the balance you still owe, so it falls as you pay down the loan. A factor rate charges the full fee up front, on the full amount, no matter how quickly you repay. That has two effects:

1. Shorter terms cost more per year. You pay the same $15,000 whether you repay in three months or eighteen, so the faster you repay, the higher the annualized cost.
2. You pay for money you've already returned. The fee is set on the full amount for the full term, even though you start paying the money back, often the next business day.

Here's what one factor rate works out to across common terms, using business-daily payments. Figures come from our financing cost calculator.

Estimated APR, business-daily payments, 21 business days a month, no upfront fees.

How to turn a factor rate into an estimated APR

1. Find the total payback. Amount funded × factor rate.
2. Find the payment and how many there are. Total payback ÷ number of payments. For a holdback, divide your expected daily remittance into the total payback.
3. Subtract upfront fees from the amount you actually receive. Origination, underwriting or other fees taken out of your funding raise the real cost.
4. Solve for the rate. Find the periodic rate at which your payments equal the funds you received, then multiply by the number of payment periods in a year (about 252 business days, 52 weeks or 12 months).

Step 4 needs a spreadsheet RATE function or a calculator. Our financing cost calculator handles fixed payments, and the merchant cash advance calculator handles percentage holdbacks.

Holdbacks: why your sales change the APR

With a true percentage holdback, the dollar cost is fixed but the repayment speed depends on your sales. Take a $50,000 advance at a 1.35 factor rate ($67,500 total payback) with a 12% holdback:

A strong quarter makes the same advance more expensive on an annualized basis. A slow quarter lowers the APR but stretches the drain on your cash. If your agreement uses a fixed daily debit instead of a true percentage, your payment doesn't fall when sales do unless the agreement allows an adjustment, so ask how that works before you sign.

Compare total cost, APR and cash flow

No single number tells the whole story. Here's a $50,000 advance at a 1.30 factor rate over six months next to a $50,000 term loan at 18% APR over 24 months, with no upfront fees on either:

In this example the loan wins on every measure. But change the inputs, such as a lower factor rate or a longer, higher-rate loan, and an advance can cost fewer total dollars while still carrying a far higher APR. Run your own offers through the MCA vs business loan calculator, and check how the payments affect your debt service coverage.

What providers must disclose

The federal Truth in Lending Act, which gives consumers a standard APR on loans and credit cards, doesn't apply to credit taken mainly for business purposes. So whether you see an APR on a business funding offer depends on your state.

• California: since Dec 9, 2022, providers must give a signed disclosure on offers of $500,000 or less, including merchant cash advances, that shows an estimated APR alongside the funding provided, finance charge, total payback, payments and estimated term. Since Jan 1, 2026, a provider that quotes a factor rate or other pricing figure after making a specific offer must also state the APR. Banks and deals secured by real estate are exempt.
• New York: covered offers up to $2.5 million to businesses run principally from New York must show an estimated APR, the finance charge, total repayment and estimated term. The state's rules took effect Feb 1, 2023.
• Vermont: an estimated APR on commercial financing under $1 million becomes required on July 1, 2027.

Both California's and New York's forms add a line for fee-based products such as advances: "APR is not an interest rate." It's there because the cost comes from a fixed fee, not interest that builds over time. The APR is still the best way to compare that fee with a loan.

Several other states require a written disclosure of the total dollar cost and payments, but no APR:

If your state isn't listed, or your offer doesn't include an APR, you can still work one out yourself with the steps above or our financing cost calculator.

Before you sign

• What's the total payback in dollars, and what's the estimated APR?
• What fees come out of the funding, and how much will actually reach my account?
• Is the payment a true percentage of sales, or a fixed daily or weekly debit? Can it be adjusted if sales drop?
• Does paying early reduce what I owe, or is the full payback due either way?
• What happens if I miss a payment, and what collateral or personal guarantee is involved?
• Is a broker involved, and how is the broker paid?