What is a factor rate?
A factor rate is a multiplier quoted on merchant cash advances and some short-term loans. Multiply it by the amount you receive and you get the single fixed total the funder will collect. A $50,000 advance at a 1.30 factor rate repays $65,000 — $50,000 of principal plus $15,000 of cost, collected through daily or weekly debits. Unlike an interest rate, the factor rate never shrinks as you repay: the cost is fixed on day one.
How do you convert a factor rate to an interest rate?
Two conversions are useful, and they answer different questions:
- Cost as a percent. Subtract 1 and move the decimal: a 1.30 factor rate costs 30% of the advance, or 30 cents per dollar. This is the flat, unconditional cost.
- Nominal annual rate. Divide that percent by the term in years. 30% over 6 months is a nominal 60% a year; over 12 months it is a nominal 30% a year. This treats the cost like simple interest.
- Estimated APR. Because an MCA repays in short, frequent debits, the money is outstanding for less time on average than the stated term suggests, and the true annualized cost compounds. A 1.30 factor rate over 6 months of daily debits is roughly a 198% APR; over 12 months, roughly 73%.
The APR is the right number when comparing against a loan or a credit line, because those prices are also quoted as annual rates on a declining balance. The nominal rate understates an MCA for the same reason.
Factor rate conversion table
The table in the calculator shows common factor rates with the cost per $10,000 borrowed and the estimated APR at 6- and 12-month terms. Two patterns are worth memorizing. First, each 0.05 of factor rate adds $500 of cost per $10,000 — a 1.45 advance costs half again as much as a 1.30. Second, the same factor rate more than doubles in APR when the term halves from 12 months to 6, because the same dollars are rented for half the time.
What a factor rate leaves out
The quoted factor usually excludes origination or underwriting fees, ACH fees, and any required insurance, which raise the real cost above the conversion here. Some contracts use calendar days instead of business days, which shortens the term and pushes the APR higher. And if the contract has an early-payoff discount, the effective cost falls when you settle early — ask for that clause in writing before you sign.
Factor rate vs interest rate on a loan
A factor rate prices the whole advance up front on the original amount; an interest rate prices the declining balance, so you pay interest only on what you still owe. That is why a 12% APR term loan and a 1.10 factor rate advance — both “10%ish” at first glance — are not close: the loan repays roughly $53,300 on a $50,000 balance over a year while the advance repays $55,000, and the gap widens as factor rates rise. Compare total payback in dollars first, then APRs.
Next steps: see the debit sizes in our daily debit calculator, the full payback picture in the MCA payback & APR calculator, and the background in what a merchant cash advance is.