Factor Rate to APR: What a Merchant Cash Advance Really Costs
A factor rate is a multiplier on the amount advanced, not an interest rate. A $50,000 advance at a 1.35 factor means you repay $67,500, and that $17,500 cost is fixed no matter how quickly you pay. Because the payback is compressed into a short term, the annualized cost is far higher than the factor suggests: a 1.35 over six months is roughly 126 percent APR, and over four months roughly 188 percent.
If you are reading this with an offer in hand, the fastest way to know whether it is fair is to translate the factor rate into two numbers: dollars of cost and an approximate APR. Neither is on the offer sheet. Both take about a minute once you know the method, and both are computed automatically by our free MCA offer checker.
How a factor rate works
Multiply the advance by the factor rate and you get the total payback, sometimes labeled "purchased amount" or "RTR" (right to receive). The difference between payback and advance is the cost of the money, and it is locked in on day one. Unlike a loan, where interest accrues over time and paying early reduces the total, an MCA's cost does not change with time unless the contract includes a prepayment discount.
| Factor rate | Total payback | Cost of the money |
|---|---|---|
| 1.20 | $60,000 | $10,000 |
| 1.25 | $62,500 | $12,500 |
| 1.30 | $65,000 | $15,000 |
| 1.35 | $67,500 | $17,500 |
| 1.40 | $70,000 | $20,000 |
| 1.49 | $74,500 | $24,500 |
Why the term changes everything
Two offers at the same factor rate can have wildly different annualized costs. The dollars are the same; the speed is not. Paying $17,500 to use $50,000 for a year is one thing. Paying the same $17,500 to use it for four months, while the balance shrinks every business day, is closer to a 188 percent annual rate. The table below is computed from the actual payment schedule (internal rate of return on daily payments, 21 business days per month), not from a rule of thumb.
| Factor rate | 4 months | 6 months | 9 months | 12 months |
|---|---|---|---|---|
| 1.20 | ~112% | ~75% | ~50% | ~38% |
| 1.25 | ~138% | ~92% | ~62% | ~46% |
| 1.30 | ~163% | ~109% | ~73% | ~55% |
| 1.35 | ~188% | ~126% | ~84% | ~63% |
| 1.40 | ~213% | ~142% | ~95% | ~71% |
| 1.49 | ~255% | ~171% | ~114% | ~86% |
Fees raise the real cost more than they look
Fees deducted at funding do two things at once: they reduce the money you receive and they leave the payback unchanged. A 3 percent origination fee on a $50,000 advance means $48,500 lands in your account while you still repay the full $67,500 on a 1.35. That moves a six-month 1.35 from roughly 126 percent to roughly 140 percent APR. Stack a 5 percent set of fees on a 1.40 over six months and the number is about 166 percent. Always compute cost against the net funded amount, not the headline advance.
| Term | APR with no fees | APR with 3% fee deducted |
|---|---|---|
| 4 months | ~188% | ~209% |
| 6 months | ~126% | ~140% |
| 9 months | ~84% | ~93% |
| 12 months | ~63% | ~70% |
Paying early: discount or penalty?
Because the cost is fixed, paying early without a discount is effectively a penalty: the same dollars over less time. A 1.35 that was quoted over six months but paid off in three runs at roughly 250 percent annualized. Many funders will write a prepayment discount schedule into the contract if you ask (for example, a reduced factor if paid within 30, 60, or 90 days). If a funder refuses any discount and also refuses to state its early payoff policy in writing, treat that as a warning sign; our red flags guide explains why.
Holdback versus fixed ACH
Traditional MCAs take a fixed percentage of daily card sales (a holdback), so the term stretches when sales slow. Most offers today use a fixed daily or weekly ACH debit instead, which makes the term predictable but removes the built-in cushion. If your contract has a fixed ACH, it should also have a reconciliation clause letting you request an adjustment when revenue drops. That clause is part of what legally distinguishes a purchase of receivables from a loan, and a funder that resists it is telling you something.
Ask for the APR disclosure even if your state does not require it
California's commercial financing disclosure rules under SB 1235 (in effect since December 2022) and New York's Commercial Finance Disclosure Law (in effect since August 1, 2023, for financings up to $2.5 million) require providers to show an APR-style figure alongside the factor rate. Several other states have followed with their own disclosure laws. Any funder operating nationally already produces that disclosure for New York and California merchants. Ask for the same form. A funder who will not show you the number for a merchant in Texas that they must show a merchant in New York has answered your question.
Want the math done on your actual offer?
Upload the offer and three months of statements. You get the dollar cost, the approximate APR, the payment as a share of your deposits, and a read on whether your file supports better terms. Free and confidential.
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.
Questions readers ask
What does a 1.3 factor rate mean?
You repay 1.3 times the amount advanced. On $40,000 that is $52,000 in total, so the money costs $12,000. Over six months with daily payments that is roughly 109 percent APR; over twelve months roughly 55 percent.
How do I convert a factor rate to an interest rate?
There is no exact shortcut because payments shrink the balance daily. A rough estimate: (factor rate − 1) × (12 ÷ term in months) × 2. For a 1.35 over six months that gives 140 percent, close to the IRR-based figure of about 126 percent. Use our free offer checker for the precise number on your schedule.
Is a 1.2 factor rate good?
It depends entirely on the term and fees. A 1.20 over twelve months (~38% APR) is at the cheaper end of the MCA market. A 1.20 over four months (~112% APR) is not. Always evaluate factor rate and term together.
Why don't MCA offers show an APR?
Because an MCA is legally structured as a purchase of future receivables rather than a loan, federal truth-in-lending rules do not apply. State laws in California, New York and several others now require an APR-style disclosure anyway, and you can ask any funder for it.
Keep reading
- Is My Merchant Cash Advance Offer Fair? How to Check in 10 MinutesHolding an MCA offer? Here is how to tell whether it is fair: the five numbers you need, the payment-capacity test, typical factor-rate ranges by file grade, and what to ask for before you sign.
- How to Compare Two Merchant Cash Advance Offers Side by SideTwo MCA offers, same advance, different factor rates and terms. A worked example with real numbers shows which one costs less, which one your cash flow can carry, and the eight-line worksheet to run on any pair of offers.
- How to Negotiate a Merchant Cash Advance Offer (What Actually Moves)MCA offers are more negotiable than most merchants think. What funders will move on (term, fees, payment frequency, prepayment discounts, contract clauses), what gives you leverage, and the three sentences that get results.