Factor Rate vs APR: The True Cost of a Merchant Cash Advance

What is a factor rate?

A factor rate is a multiplier applied to the advance amount (sometimes called the purchase price) to give the total you repay (the purchased amount). An advance of $50,000 at a factor rate of 1.35 means you repay $67,500. The $17,500 difference is the funder's charge. It is fixed when you sign and does not shrink if you repay faster.

Factor rates in the market commonly fall somewhere around 1.1 to 1.5, with higher numbers for newer businesses, uneven sales or businesses that already have an advance outstanding. Those are broad market indications from industry sources, not a benchmark, and some offers go higher. Repayment is usually collected through a fixed daily or weekly ACH debit, or through a holdback, a percentage of daily card sales that is often quoted at roughly 10% to 20%.

Why is the factor rate not the same as an interest rate?

An APR spreads the cost over a year and accounts for the fact that you are paying the money back as you go. A factor rate does neither. Two things make an MCA cost far more than its factor rate suggests.

• Speed: a 1.35 factor rate repaid over six months costs the same dollars as one repaid over twelve, so the annualized cost of the six month version is roughly double.
• Declining balance: daily debits start immediately, so on average you only have the use of about half the money over the term, while the charge is calculated on all of it.
• Fees: origination, underwriting and ACH fees are usually deducted before funding, so the cash you actually receive is smaller than the figure the factor rate applies to.
• Renewals: if part of a new advance pays off an old one, you pay a new factor on money you already owed.

How do you convert a factor rate to an estimated APR?

You need four numbers from the agreement: the cash you actually receive after all deductions, the total repayment, the payment amount, and how often payments are taken. The estimated APR is the annual rate at which the stream of payments would exactly repay the cash you received. Spreadsheet functions such as RATE or IRR do this: enter the cash received as a positive number, each payment as a negative number, solve for the rate per period, then multiply by the number of periods in a year (about 252 business days for daily debits, 52 for weekly).

Worked example. A $50,000 advance at a 1.35 factor rate means $67,500 to repay. The funder deducts $1,500 in fees, so you receive $48,500. Repayment is a fixed daily debit over roughly six months of business days, about 126 payments of $535.71. Solving for the rate gives an estimated APR of roughly 140%. Without the fees, the same deal is still roughly 126%. The cost per dollar is easier to explain to a business partner: you pay $19,000 to use $48,500, or about 39 cents per dollar received, and you pay it within six months.

It is an estimate because sales-based payments can change. If your holdback is a percentage of card sales and sales rise, you repay faster and the effective APR goes up; if sales fall and reconciliation works, it goes down. The estimate tells you the cost at the expected pace, which is what you need to compare offers.

How repayment speed changes the cost

The table holds the deal constant ($48,500 received, $67,500 repaid, fixed business-day debits) and changes only how long repayment takes. The total dollar cost never moves. The estimated APR moves a great deal. For comparison, a hypothetical 12 month amortizing term loan of $48,500 at 15% APR would cost roughly $4,000 in interest.

Does the law require funders to show an APR?

The federal Truth in Lending Act requires an APR for consumer credit, not for business financing, so there is no national APR rule for an MCA. A growing group of states fills part of the gap. California requires covered providers to disclose an annual percentage rate for many commercial financing offers of $500,000 or less, and from January 1, 2026 (SB 362) it restricts using the words "rate" or "interest" in a misleading way when quoting the price. New York's commercial finance disclosure law requires an estimated APR for covered offers up to $2.5 million, and its regulation sets out how funders estimate it for sales-based financing.

Other states with disclosure laws, such as Florida, Georgia, Kansas, Missouri, Utah, Virginia, Connecticut and Texas, generally require total cost figures (amount funded, amount disbursed, total repayment, finance charge, payment amount and frequency) rather than an APR. Thresholds and exemptions differ, so check the current rules for your state. If your state requires no APR, you can still ask for one, or calculate it yourself as shown above.

Hidden costs that never appear in the factor rate

When you compare offers, add these to the factor amount so you are comparing total cost, not headline price.

• Origination, underwriting, due diligence or "admin" fees deducted at funding.
• Broker fees, which may be paid by you, by the funder, or folded into a higher factor rate.
• Recurring ACH or "program" fees charged weekly or monthly.
• Returned debit (NSF) fees, often charged per failed debit.
• Default fees, sometimes a percentage of the remaining balance, plus collection and attorney fees.
• UCC filing and lien search fees.
• The payoff of an old advance inside a renewal, which reduces your net cash but not your repayment.

How do you compare an MCA with a business loan or line of credit?

Put every offer on the same four rows: cash received, total repaid, time to repay, and estimated APR. Then add the non-price terms: is there a personal guarantee, a confession of judgment, a blanket lien on all assets, a prepayment penalty or discount, and an anti-stacking rule? A term loan with a higher monthly payment can be cheaper and safer than an advance that looks easier because it is "only" a factor of 1.25.

A useful rule of thumb: ask what the money will earn. If the advance funds inventory you will sell within 60 days at a 60% margin, a high APR may still pencil out. If it covers payroll during a slow season, you are paying a premium to borrow against sales that may not arrive, and a reconciliation right that actually works matters more than the price. If repayment would take more than about a third of your daily deposits, the advance itself may create the next cash crunch.

Negotiating the price and the payoff

Factor rates do move, especially if you have competing offers in writing. Useful asks include: a lower factor rate in exchange for a longer term (which lowers the daily payment but also lowers the APR), removal or reduction of the origination fee, an early payoff discount schedule written into the contract, and weekly rather than daily debits so you have more control over cash. If you are being offered a renewal, ask for the figures on a stand-alone basis and compare it against paying the current advance down and waiting. When you do pay an advance off, get a written payoff letter and confirmation that the UCC lien will be terminated; a loan payoff letter request can help structure that.

The Business Financing analyzer extracts the purchase price, fees, total repayment and payment schedule from your agreement and calculates the estimated APR in code from those figures, labelled as an estimate, so you can line up offers from different funders on one scale.