What is the difference between a factor rate and an APR?
A factor rate is a simple multiplier applied once to the amount advanced. A 1.20 factor rate on $50,000 means you repay $60,000 in total, no matter how long you take. An APR expresses cost as a rate per year, so it rises when you repay faster and falls when you repay slower. The same 1.20 factor rate is roughly a 70% APR over six months, 36% over twelve months and 25% over eighteen — identical dollars, very different annualised cost. That is why the two figures cannot be compared directly, and why a factor rate that looks small next to a bank’s interest rate usually is not.
The difference in one paragraph
Interest accrues on a balance over time, so a term loan’s cost depends on how long you hold it. A factor rate does not work that way. It is applied once, at the start, to the amount advanced, and the total you owe is fixed from that moment. Pay it off in four months or fourteen and you owe the same dollars. This makes a factor rate genuinely simpler than an interest rate — and genuinely incomparable to one.
“1.20” reads like 20%, and 20% reads like a slightly expensive loan. But 20% of the advance repaid over six months is an annualised cost close to 70%. The number is not lying to you; it is just measuring something different.
Converting a factor rate to an APR
You need three things: the amount advanced, the factor rate, and how long repayment will actually take. The third is the one people skip, and it is the one that does all the work.
Step 1 — find the total cost
Multiply the advance by the factor rate, then subtract the advance.
Step 2 — annualise it
Divide the cost share by the repayment term in years. Six months is 0.5 years.
That 40% is the floor, not the answer. It assumes you have the full $50,000 for the whole six months, and you do not — you start repaying tomorrow.
Step 3 — account for the declining balance
Because an advance is repaid daily from the first day, your average outstanding balance over the term is roughly half the amount advanced. Correcting for that roughly doubles the simple figure. For a percentage-based holdback repaid in even daily instalments, the effective APR lands close to:
The true figure for this example sits in the region of 70%, because repayment is not perfectly even and the doubling is an approximation rather than an identity. But it tells you the order of magnitude immediately, which is what you need when you are comparing two offers on a phone call.
The conversion table
Approximate effective APR for a single advance, by factor rate and repayment term. Use it to sanity-check an offer, not to price one.
| Factor rate | Cost of the advance | Repaid in 6 months | 12 months | 18 months | 24 months |
|---|---|---|---|---|---|
| 1.08 | 8% | ≈ 29% | ≈ 15% | ≈ 10% | ≈ 8% |
| 1.15 | 15% | ≈ 53% | ≈ 28% | ≈ 19% | ≈ 14% |
| 1.20 | 20% | ≈ 70% | ≈ 36% | ≈ 25% | ≈ 19% |
| 1.30 | 30% | ≈ 100% | ≈ 53% | ≈ 36% | ≈ 28% |
| 1.40 | 40% | ≈ 129% | ≈ 69% | ≈ 47% | ≈ 36% |
| 1.50 | 50% | ≈ 156% | ≈ 84% | ≈ 58% | ≈ 45% |
Figures are approximations for an advance repaid in even instalments over the stated term, rounded. Your actual cost depends on the holdback percentage, your daily sales, and any fees withheld at origination.
Why repaying faster costs you more
This is the part that surprises people, and it is the single most useful thing to understand about the product.
On a term loan, paying early saves you interest. On a fixed factor rate, the total is set at signing, so paying early saves you nothing — it just compresses the same dollars into less time, which raises your effective annual cost. A strong sales month accelerates repayment, which is good for your balance sheet and bad for your APR.
Two practical consequences. First, if a provider offers an early payoff discount, that is worth real money and is worth asking about explicitly — it is one of the few levers that changes the total. Second, when you compare an advance to a term loan, compare over the term you will realistically take, not the maximum term on the paperwork.
What factor rates actually run in the market
Industry analysis of the merchant cash advance market in 2026 puts typical factor rates in the range of 1.15 to 1.55, with effective annualised costs spanning roughly 40% to over 350% depending on how quickly the advance is repaid. Average advance sizes sit between $30,000 and $85,000, up from $25,000 to $75,000 in 2024. The market is estimated at $18–25 billion a year across 700 to 1,000 active providers.
Set that against the alternatives. As of September 2026 the Prime Rate is 6.75%, and SBA 7(a) variable rates cap between 9.75% and 13.25% depending on loan size. An SBA loan is dramatically cheaper capital. It also takes 30 to 60 days, requires two years of trading and a 680+ credit score, and will not help you cover payroll on Friday. That trade — cost against speed and access — is the entire decision.
Rates at the bottom of the range go to the strongest files: long trading history, stable deposits, high card volume, no existing advances. If you are being quoted near the top of the range, the honest question is not “can I get 1.08” but “is an advance the right product for this need at all”.
Comparing an advance against a term loan
Put both on the same footing before you decide. Three columns is enough.
| Merchant cash advance | Business term loan | |
|---|---|---|
| How cost is quoted | Factor rate, applied once | Interest rate, accruing over time |
| Does early payoff save money | Usually no, unless a discount is written in | Yes, interest stops accruing |
| Payment | A percentage of daily sales, so it flexes | Fixed, regardless of revenue |
| Speed to funding | Same day to 48 hours | 48 to 72 hours, longer at banks |
| Typical credit bar | From 500 | Materially higher |
| Collateral | None required | Varies |
The right comparison is not which number is smaller. It is which product you can actually qualify for today, at a cost you can service out of the revenue the money will help you generate. An advance that bridges a fortnight until a large receivable lands is a sensible use of expensive capital. The same advance used to cover a structural shortfall is not.
Common questions
Is a factor rate the same as an interest rate?
No. A factor rate is a multiplier applied once to the amount advanced, so the total repayment is fixed at signing and does not change with time. Interest accrues on an outstanding balance, so the total depends on how long you hold the money. A 1.20 factor rate produces the same dollars whether you repay in six months or two years; a 20% interest rate does not.
How do I convert a factor rate to an APR?
Multiply the advance by the factor rate and subtract the advance to get the total cost. Express that as a share of the advance, divide by the repayment term in years, then roughly double the result to account for the declining balance as you repay. A 1.20 factor rate on a six-month term works out near 70% effective APR.
Does paying off a merchant cash advance early save money?
Usually not. Because the total is fixed by the factor rate at signing, early repayment compresses the same dollars into a shorter period, which raises your effective annual cost rather than lowering your total. The exception is an agreement that specifically provides an early payoff discount, which is worth asking about before you sign.
What is a typical factor rate in 2026?
Industry analysis puts the typical range at 1.15 to 1.55, with effective annualised costs from roughly 40% to over 350% depending on repayment speed. Rates at the low end go to the strongest applications — long trading history, stable deposits, high card volume and no existing advances.
Sources
- Merchant Cash Advance Industry Report 2026 — Credible Law
- SBA Loan Rates, updated 1 September 2026 — NerdWallet
- State Commercial Financing Disclosure Laws — Venable LLP, March 2026
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