A merchant cash advance comes with a number on the page that looks like a decimal — 1.20, 1.35, 1.45. That number, the factor rate, determines exactly how much you repay. But it tells you almost nothing about the true annualized cost of borrowing. That calculation is more involved, and the result often surprises business owners evaluating their first MCA.
This guide explains exactly how factor rates work, how to convert them to APR, and — critically — why APR is a misleading comparison metric for MCAs in ways that matter when you’re making a funding decision.
What a Factor Rate Is (and the One Formula You Need)
A factor rate is a decimal multiplier applied to your advance amount to calculate total repayment. It is applied once, at the time of funding, and does not change.
Total repayment = Advance amount × Factor rate
Examples:
- $25,000 × 1.20 = $30,000 total repayment ($5,000 cost)
- $50,000 × 1.30 = $65,000 total repayment ($15,000 cost)
- $100,000 × 1.40 = $140,000 total repayment ($40,000 cost)
The cost as a percentage of the advance is simply (factor_rate - 1) × 100. A 1.30 factor rate costs 30% of the advance — that percentage is your best single-number comparison metric, because it does not depend on how fast you repay.
Factor rates typically range from 1.09 to 1.49 across the market. Most providers use 1.09–1.20 for the strongest borrower profiles and 1.35–1.49 for higher-risk applications. Anything above 1.49 is unusual and warrants careful scrutiny.
How to Convert a Factor Rate to APR
APR (Annual Percentage Rate) adjusts the cost for time, expressing it as a yearly rate. There are two methods — and they produce very different numbers.
Method 1: Simple annualized rate (quick estimate)
Simple APR = (factor_rate − 1) × (365 ÷ repayment_days) × 100
This is easy to calculate but understates the real cost. It treats the entire advance as outstanding for the full term, ignoring that your balance shrinks daily.
Method 2: True amortized APR (the number that matters)
The true APR is the internal rate of return (IRR) on the actual daily cash flows — the rate that discounts all your daily payments back to the original advance amount. Because you’re repaying a little each day against a shrinking balance, the effective annual rate runs roughly 2–3× the simple figure.
You can’t solve it by hand easily, but the rule of thumb is reliable: multiply the simple annualized rate by 2.5 for a rough true APR estimate, or use the MCA cost calculator for exact figures.
Example calculation:
- Advance: $50,000
- Factor rate: 1.30
- Total repayment: $65,000
- Holdback: 12% of daily credit card sales
- Average daily credit card revenue: $2,500
- Daily holdback payment: $2,500 × 12% = $300
- Estimated repayment period: $65,000 ÷ $300 = 217 days
Simple APR = 0.30 × (365 / 217) × 100 = 50.5% Estimated true APR = ~126%
The same factor rate produces dramatically different figures depending on repayment speed:
| Factor Rate | Repayment Term | Simple Annualized | Estimated True APR* |
|---|---|---|---|
| 1.20 | 90 days | 81.1% | ~200% |
| 1.20 | 180 days | 40.6% | ~100% |
| 1.20 | 365 days | 20.0% | ~50% |
| 1.30 | 90 days | 121.7% | ~300% |
| 1.30 | 180 days | 60.8% | ~150% |
| 1.30 | 365 days | 30.0% | ~75% |
| 1.40 | 90 days | 162.2% | ~400% |
| 1.40 | 180 days | 81.1% | ~200% |
| 1.40 | 365 days | 40.0% | ~100% |
*Estimated true APR ≈ 2.5× the simple annualized rate — the IRR on actual daily payments typically runs 2–3× the simple figure, and these columns apply a mid-range 2.5× estimate consistently. Holdback-model MCAs (where payments float with daily sales) land in a similar range but vary with revenue. Use the MCA calculator for your exact terms.
The Counterintuitive Part: Faster Repayment = Higher APR
With a traditional loan, paying off early saves money — you reduce the total interest paid. With an MCA, the opposite is true.
Because the dollar cost is fixed at signing, repaying faster does not reduce what you owe. It compresses the same cost into a shorter time window, raising the annualized rate. Two businesses taking the same $50,000 MCA at a 1.30 factor both pay $65,000. The business with stronger revenue repays in 4 months and sees a ~91% simple APR / ~228% true APR. The business with weaker revenue repays in 14 months and sees a ~26% simple APR / ~65% true APR. Both paid exactly $15,000 for the same $50,000.
Practical implication: Neither simple nor true APR is a reliable planning metric for MCAs, because both shift with your revenue trajectory. The number that stays constant — and the one that actually tells you what the MCA costs in dollars — is the total cost as a percentage of the advance (factor_rate − 1). Use true APR only when comparing against a conventional loan’s advertised APR.
Factor Rate by Borrower Profile
MCA providers set factor rates based on their assessment of repayment risk. A rough guide based on market practice:
| Profile | Typical Factor Rate |
|---|---|
| 2+ years in business, $50K+/month revenue, 650+ credit | 1.09 – 1.20 |
| 1–2 years in business, $25K–$50K/month, 580–650 credit | 1.20 – 1.35 |
| Under 1 year, or revenue below $20K/month, or credit below 580 | 1.35 – 1.50 |
| Stacked MCAs, prior defaults, or distressed business | 1.45+ (red flag territory) |
These are market estimates — actual rates vary by provider. Get quotes from at least three providers and compare the total repayment amount, not just the factor rate (which doesn’t reflect hold-back percentage, origination fees, or other costs). For a deeper breakdown of how providers price these rates, see Understanding Factor Rates, and if you have competing offers, how to negotiate your factor rate.
MCA Cost vs. Traditional Financing: A Realistic Comparison
| Financing Type | Example Terms | Total Cost on $50K |
|---|---|---|
| MCA — strong profile | 1.18 factor, 6-month term | $9,000 (18%) |
| MCA — average profile | 1.30 factor, 8-month term | $15,000 (30%) |
| SBA 7(a) term loan | 10.25% APR, 5-year term | ~$13,300 |
| Bank term loan | 8.5% APR, 3-year term | ~$6,800 |
| Online term loan | 22% APR, 2-year term | ~$11,700 |
| Business line of credit | 18% APR | Interest-only on drawn balance |
The SBA comparison is illustrative: a 1.30-factor MCA repaid over 8 months costs $15,000 on $50,000, while a 5-year SBA loan at 10.25% costs roughly $13,300 — comparable in dollar terms, but the SBA loan spreads those payments over 60 months versus 8. Whether the MCA’s speed and approval flexibility justify that structure depends entirely on your situation — our MCA vs. SBA loan comparison walks through when each makes sense.
Why MCA Providers Use Factor Rates (Not APR)
MCAs are legally structured as “purchases of future receivables” rather than loans. This classification was established to sidestep state usury laws, which cap interest rates on loans. Because they are not loans, MCAs are not subject to the Truth in Lending Act’s APR disclosure requirements.
California’s SB 1235 (effective December 2022) and New York’s SBFA require commercial financing providers to disclose estimated APR on advances over certain thresholds — but these laws apply only to those states, enforcement is inconsistent, and the APR estimates can vary based on methodology. Most other states have no MCA disclosure requirements.
In short: a provider quoting you a factor rate of 1.30 is not hiding the APR — they are operating within the legal structure of their product. But you are responsible for doing the APR conversion yourself if you want to compare against a traditional loan.
Red Flags in Factor Rate Offers
- Factor rate not stated in writing. Legitimate providers always state the factor rate clearly in the agreement. Verbal-only quotes are a red flag.
- “Daily fee” language instead of a factor rate. Some providers describe the cost as a daily percentage to obscure the total. Convert to a factor rate first: $150/day for 365 days on a $50,000 advance is $54,750 in total payments — a factor rate of about 1.10. A “small” daily number can still hide a high factor rate over a long term.
- Prepayment discount of less than 5%. Since the cost is fixed, a legitimate provider may offer a modest prepayment discount. If the discount is zero or nominal, you are seeing a contract designed to collect regardless.
- No holdback percentage disclosed. The holdback rate directly determines how fast you repay — and therefore how high the APR will be. Providers must disclose this. If it is not in the contract, ask for it in writing before signing.
- Factor rate above 1.49. The mainstream MCA market caps around 1.49 for even the highest-risk profiles. Rates above that are associated with distressed borrowers, stacking situations, or predatory providers.
The Bottom Line
When evaluating a merchant cash advance:
- Use total cost % (factor rate − 1) for apples-to-apples MCA-to-MCA comparison — APR fluctuates with repayment speed; the percentage cost on the advance does not.
- Use true amortized APR when comparing against a bank loan — simple annualized rate runs ~2.5× lower than the true figure and will make the MCA look cheaper than it is. A 1.30 factor at 6 months is ~61% simple but ~150% true APR.
- Estimate your repayment term using your average daily holdback to understand where on the APR range you will likely land.
- Compare total dollar cost against a conventional loan for the same amount and term — the difference tells you what the MCA’s speed and accessibility are actually costing you.
- Get the factor rate, holdback percentage, and total repayment amount in writing before signing. If a provider won’t put those three numbers on paper, walk away.
See how MCA costs compare across our 24 reviewed providers or check whether an MCA makes sense for your situation with our free MCA calculator.