The factor rate is the pricing mechanism used for merchant cash advances — and it's deliberately confusing for business owners who are used to thinking about interest rates. A 1.30 factor rate sounds modest. An equivalent annualized interest rate of 65–90% sounds alarming. They're describing the same cost — but most merchants only see the factor rate.
Here's a complete, clear explanation of what factor rates mean, how to calculate your actual cost, and how to make meaningful comparisons across different offers.
What Is a Factor Rate?
A factor rate is a decimal multiplier applied to your advance amount to calculate your total repayment. If you're advanced $50,000 at a factor rate of 1.30, your total repayment is $50,000 × 1.30 = $65,000. The $15,000 difference is the cost of the advance.
Unlike an interest rate, which accrues over time and decreases as you pay down principal, a factor rate is a fixed multiplier applied to the original advance amount. You owe the same total regardless of how quickly you repay.
Factor Rate to Dollar Cost Calculator
| Factor Rate | $25,000 Advance | $50,000 Advance | $100,000 Advance |
|---|---|---|---|
| 1.10 | $27,500 (cost: $2,500) | $55,000 (cost: $5,000) | $110,000 (cost: $10,000) |
| 1.20 | $30,000 (cost: $5,000) | $60,000 (cost: $10,000) | $120,000 (cost: $20,000) |
| 1.30 | $32,500 (cost: $7,500) | $65,000 (cost: $15,000) | $130,000 (cost: $30,000) |
| 1.40 | $35,000 (cost: $10,000) | $70,000 (cost: $20,000) | $140,000 (cost: $40,000) |
| 1.50 | $37,500 (cost: $12,500) | $75,000 (cost: $25,000) | $150,000 (cost: $50,000) |
What Factors Drive Factor Rate Pricing
- Credit score — lower FICO scores receive higher factor rates as the funder prices in credit risk
- Industry risk — some industries (restaurants, retail) carry higher default risk and are priced accordingly
- Time in business — newer businesses get higher factor rates than established operators
- NSF count on bank statements — more NSFs signal financial instability and raise the factor rate
- Open positions — existing MCA positions increase risk and raise pricing
- Revenue consistency — irregular revenue gets priced higher than predictable recurring deposits
Factor Rate vs. APR: The Honest Comparison
To convert a factor rate to an approximate APR, you need to know the repayment term. Divide the total fee by the advance amount to get the total cost percentage, then annualize it:
| Factor Rate | 6-Month Term | 9-Month Term | 12-Month Term |
|---|---|---|---|
| 1.20 | ~40% APR | ~27% APR | ~20% APR |
| 1.30 | ~60% APR | ~40% APR | ~30% APR |
| 1.40 | ~80% APR | ~53% APR | ~40% APR |
Note: these are approximations. Actual APR depends on exact repayment timing. The shorter the repayment term, the higher the effective APR for any given factor rate.
How to Compare Offers Using Factor Rate
When comparing two MCA offers, don't just compare factor rates — compare the total cost in dollars over the same period. An offer with a lower factor rate but a shorter term might have a higher daily payment that strains cash flow. Calculate: Total Repayment, Daily Payment, Term Length.
Always ask for competing offers before accepting an MCA. Working with a commercial lending broker who submits to multiple funders simultaneously gives you 3–5 competing offers — so you can choose based on total cost, daily payment, and term length, not just whichever offer arrived first.
What Factor Rates Are Reasonable in 2026
Market factor rates in 2026 range from approximately 1.10 (A-paper deals, strong borrowers) to 1.50+ (high-risk deals, challenged credit). The middle of the market for a creditworthy small business with 2+ years of history and consistent revenue is typically 1.20–1.35. Factor rates above 1.45 should prompt serious scrutiny — either the deal has significant risk factors, or you haven't shopped the market adequately.
Bottom Line
Factor rates are straightforward once you understand the math. Multiply the advance by the factor rate to get the total repayment. Compare that total cost across competing offers alongside daily payment amounts and term lengths. Never accept the first offer — the market has enough competition that shopping for better terms almost always produces results.