Factor rates are one of the most misunderstood numbers in alternative funding — mostly because they look like an interest rate but don't behave like one. Confusing the two is the single most common mistake business owners make when comparing offers.
What a Factor Rate Actually Is
A factor rate is a flat multiplier applied to the amount you're advanced, expressed as a decimal — typically somewhere between 1.1 and 1.5. You multiply the advance amount by the factor rate to get your total repayment amount. That's it. It doesn't compound, and it doesn't change based on how long repayment takes.
A Simple Example
Say you receive a $50,000 advance at a 1.3 factor rate:
- $50,000 × 1.3 = $65,000 total repayment
- Of that, $15,000 is the cost of the advance
That $65,000 is fixed the moment the advance is issued — it doesn't matter whether you pay it back in 4 months or 10.
Why This Trips People Up
A 1.3 factor rate sounds small — smaller than a "30% interest rate" would sound. But because factor rates don't account for time the way APR does, a fast repayment period can translate into a very high effective annual rate. If that $15,000 cost is paid off in 5 months instead of 12, the effective annualized cost is meaningfully higher than the flat number suggests.
The Questions Worth Asking Before You Sign
- What's the total dollar amount I'll repay? Not the factor rate — the actual number.
- What's the expected repayment timeline? Ask for a realistic estimate based on your revenue, since that determines the effective cost.
- Is there a prepayment discount? Some providers reduce the total if you pay off early — many don't. Know which kind you're signing.
- What's the daily or weekly payment amount, in dollars? Not just the percentage of sales — the number that'll actually leave your account.
Comparing an MCA to a Term Loan
Because factor rates and APR aren't directly comparable, the fair way to compare an MCA offer to a term loan offer is total dollar cost over a realistic timeline — not the headline rate on either one. See our MCA vs. term loan comparison for how to think through that decision.
We'll walk you through the real total cost of any offer before you commit to anything — no pressure, no obligation.