Factor Rate vs APR: How to Compare Offers Priced Two Different Ways

This comes up whenever a merchant cash advance sits next to a term loan or a line of credit. The advance says 1.30. The loan says 34 percent. The 1.30 looks smaller, and many owners read it as "30 percent" and pick it. That reading is wrong in a specific, measurable way, and the example below shows by how much. If you would rather have the conversion done on your actual paperwork, our free MCA offer checker does it from the offer sheet.

What each number actually measures

The missing ingredient in a factor rate is time. A 1.30 repaid over twelve months and a 1.30 repaid over four months cost the same dollars, but the second one is roughly three times as expensive per year. Our factor rate to APR guide has the full grid across terms.

A worked example: 1.30 factor against 34 percent APR

Two offers for $60,000. Offer A is a merchant cash advance at a 1.30 factor, daily payments over eight months, with a 2 percent fee deducted at funding. Offer B is a 24-month term loan at 34 percent APR with monthly payments. Figures for the advance are computed from the actual payment schedule (internal rate of return on 168 daily payments, 21 business days per month).

Read the rows one at a time, because each tells a different story. On dollars of cost the advance is cheaper, by about $4,300. On yearly price it is more than twice as expensive. On monthly payment it takes almost three times as much out of the account. None of those rows is wrong. They answer different questions.

Which number should decide it?

• If the money pays itself back in weeks (inventory for a signed order, materials for a job with a deposit already in hand), total dollars of cost matters most, and a short advance can be the cheaper choice.
• If the money will be working for a year or more (equipment, a build-out, a second location), the yearly price matters most. Paying 89 percent a year for something that earns over five years is the mismatch that hurts businesses.
• In every case, the monthly payment has to fit. Divide the monthly payment by your average monthly bank deposits. Under 10 percent is comfortable, 10 to 15 percent is workable for a short term, and above 15 percent is where payments start bouncing. A cheaper offer you cannot carry is not cheaper.

Can you just compare by net amount?

Net funded amount is the right starting point and the wrong stopping point. It tells you what lands in your account after fees, which is the number every other calculation should be based on. It tells you nothing about what you repay or how fast. Two offers that both net $58,800 can differ by $10,000 in cost and by months in term. Start with net amount, then put total payback, term, and payment next to it. Our side-by-side worksheet lays out the columns.

Converting a factor rate to an approximate APR yourself

1. Find the real term. Total payback divided by the payment gives the number of payments. Divide by 21 for daily programs or 4.3 for weekly to get months.
2. Use the net funded amount, not the headline advance, as the money you received.
3. Apply the rough formula: (factor rate − 1) × (12 ÷ term in months) × 2. For a 1.30 over eight months that gives about 90 percent, close to the schedule-based figure of about 82 percent before fees and 89 percent after the 2 percent fee.
4. Treat the result as an estimate. The formula runs a little high on longer terms and noticeably high on very short ones. It is good enough to tell 40 percent from 140 percent, which is usually the question.

You can also skip the arithmetic and ask. Funders that operate in California and New York already produce an APR-style disclosure for merchants in those states. Ask for the same form wherever you are. And if the term loan quotes an interest rate rather than an APR, ask for the APR including origination fees, so both offers are carrying their fees.

How this guide was produced. Written by the team that built our statement-reading underwriting engine. Cost figures are computed from cash-flow math (IRR on the actual payment schedule), not quoted from marketing pages. Nothing here is legal or financial advice.