Factor rate vs interest rate: the trap
A factor rate is a flat multiplier on the amount advanced. Borrow $50,000 at a 1.3 factor and you repay $65,000 — full stop. The trap is timing: that $15,000 cost doesn't accrue over a year like interest, it's charged over a repayment term that's typically 3–12 months, and you pay it back daily, which means you lose the use of the money almost immediately. A "30%" cost paid back within 6 months, on a balance that shrinks every single day, works out to an APR several times higher than 30%.
payment = total repayment ÷ number of payments
APR: the rate r that makes the payment stream worth the net funds received
(net funds = advance − upfront fees; solved by iteration, annualized by payment frequency)
Worked example
A $50,000 advance at a 1.3 factor with $1,500 of origination fees, repaid daily over 6 months: total repayment is $65,000.00 in 130 weekday payments of $500.00. Total cost of capital: $16,500.00. The true APR is about 122.7%.
Compare that with a 12% APR bank loan for the same $50,000 over 6 months: payments of $8,627.42/month and total interest of just $1,764.51. The MCA costs roughly 16,500.00 ÷ 1,764.51 ≈ 25× more for the same money over the same period. That difference is what the factor-rate quote hides.
Factor rate to APR conversion chart
Approximate APR for common factor rates and terms, assuming daily (weekday) payments and no upfront fees. Fees push every figure higher; enter your own numbers above for an exact comparison.
| Factor rate | 3 months | 6 months | 9 months | 12 months |
|---|---|---|---|---|
| 1.10 | 76.4% | 38.5% | 25.7% | 19.3% |
| 1.15 | 113.0% | 56.9% | 38.0% | 28.5% |
| 1.20 | 148.6% | 74.8% | 50.0% | 37.5% |
| 1.25 | 183.3% | 92.2% | 61.6% | 46.3% |
| 1.30 | 217.2% | 109.3% | 73.0% | 54.8% |
| 1.35 | 250.3% | 125.9% | 84.1% | 63.2% |
| 1.40 | 282.8% | 142.2% | 95.0% | 71.3% |
| 1.45 | 314.6% | 158.2% | 105.7% | 79.3% |
| 1.50 | 345.8% | 173.9% | 116.1% | 87.2% |
Why the APR is so much higher than the factor percentage
Three compounding reasons. First, time: the 30% cost of a 1.3 factor is charged over ~6 months, not a year — annualized, that alone doubles it. Second, amortization: you don't keep the full $50,000 for the whole term; every daily payment returns capital, so on average you had use of only about half the money. Third, fees: origination fees are deducted from what you receive but you repay the full advance. Together these routinely push MCA APRs into the 60%–200%+ range.
When an MCA can still make sense
Speed and accessibility. MCAs fund in days with minimal underwriting and no fixed collateral, and repayment often flexes with card sales — if revenue dips, some agreements collect less. For a business with a short-lived, high-margin opportunity (inventory for a peak season it can't otherwise fund) the math can work. But an MCA should be compared, not defaulted into: check an amortizing loan, a line of credit, or SBA options first — this calculator gives you the number that makes those comparable.
Frequently asked questions
Is a 1.3 factor rate the same as 30% APR?
No — that's the most expensive misunderstanding in small-business finance. 1.3 means you repay 30% more than you received, but over a short term with daily repayments the annualized rate is typically 3–6 times that.
Do MCA providers have to disclose an APR?
MCAs are structured as purchases of future receivables, not loans, so federal Truth in Lending APR disclosure generally doesn't apply. Several US states, including California and New York, now require APR-equivalent disclosure on commercial financing offers.
Can I pay an MCA off early to save money?
Usually not much — the total repayment is fixed by the factor rate, so early repayment doesn't reduce the cost the way it does with interest-bearing debt. Paying early actually raises the effective APR.
What's a holdback and how is it different from the payment here?
Many MCAs collect a fixed percentage of daily card sales (the holdback, commonly 5–20%) rather than a flat daily amount, so the term floats with your revenue. This calculator's fixed-payment model matches ACH-debit MCAs and approximates holdback deals at their expected term.
Is the APR here exact?
It's the internal rate of return of the payment stream against the net funds received, annualized by payment frequency — the same nominal APR convention lenders use. Real agreements with irregular payments will differ slightly; treat it as a comparison figure, not a legal disclosure.
What is a typical factor rate for a merchant cash advance?
Factor rates usually range from about 1.1 to 1.5. Lower rates go to businesses with strong, steady card sales, and higher rates to newer or riskier businesses. Because terms are short, even a 1.2 factor typically works out to an APR far above that of a bank loan.
Why don't MCA contracts show an APR?
An MCA is legally structured as a purchase of future receivables, not a loan, so US federal lending disclosure rules generally don't require an APR. A growing number of states now require an estimated APR on commercial financing offers, but many contracts still show only the factor rate.
How do I convert a factor rate to APR?
Multiply the advance by the factor rate to get the total repayment, divide it by the number of payments, then find the periodic rate at which those payments repay the money you actually received after fees. Multiply that rate by the number of payments per year. The calculator above and the conversion chart on this page do this for you.
Why is MCA APR so high?
The fixed cost is paid back over a few months, and daily or weekly payments return the money almost immediately, so you have the full advance for only a short time. The same dollar cost spread over a shorter effective borrowing period produces a much higher annual rate.