Factor Rate
Definition
A factor rate is a multiplier used to determine the total cost of a merchant cash advance or short-term business loan. Unlike an interest rate expressed as an annual percentage, a factor rate is a decimal number (typically between 1.1 and 1.5) that is multiplied by the principal to calculate total repayment. For example, a $100,000 advance with a 1.3 factor rate means you repay $130,000 total. Factor rates are fixed — they do not compound or change over the life of the advance. This makes them simpler to understand but often more expensive than traditional interest-based loans when compared on an annualized basis.
Example
A trucking company receives a $50,000 MCA with a 1.25 factor rate. Total repayment is $50,000 × 1.25 = $62,500. The cost of capital is $12,500 regardless of how quickly or slowly the advance is repaid.
Related Terms
Merchant Cash Advance (MCA)
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Holdback
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Retrieval Rate
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Advance Rate
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