What is a Factor Rate and Why It Matters More Than Interest Rate

Factor rates are the pricing mechanism for MCAs and some short-term loans, but they're widely misunderstood. Here's what you need to know.

What Is a Factor Rate?

A factor rate is a decimal multiplier (typically 1.10 to 1.50) applied to your advance amount to determine total repayment. It is NOT an interest rate.

Total Repayment = Advance Amount × Factor Rate

Example: $100,000 × 1.30 = $130,000 total repayment

Factor Rate vs Interest Rate

The critical difference: factor rates are fixed, interest rates are not. With a term loan at 10% interest, paying early saves money because interest stops accruing. With a factor rate of 1.30, you owe $130,000 whether you repay in 3 months or 12 months.

This means: Paying off an MCA early does NOT save you money. The total repayment amount is locked in from day one.

Converting Factor Rate to APR

To compare an MCA to a loan, you need to annualize the cost:

Estimated APR = ((Factor Rate - 1) / Repayment Term in Months) × 12 × 100

Example: Factor rate 1.35 over 6 months: ((1.35 - 1) / 6) × 12 × 100 = 70% APR equivalent

That same 1.35 factor rate over 12 months: ((1.35 - 1) / 12) × 12 × 100 = 35% APR equivalent

What's a "Good" Factor Rate?

• 1.10 - 1.20: Excellent (strong applicants, high revenue)
• 1.20 - 1.30: Good (solid business, some risk factors)
• 1.30 - 1.40: Average (newer businesses or lower credit)
• 1.40 - 1.50+: Expensive (high risk profile, last resort)

The Bottom Line

Factor rates make MCAs simple to understand but easy to underestimate. Always calculate the annualized cost and compare to alternatives before committing.