Key facts

Also called
Buy rate, factor, multiplier, purchase rate
Where you will see it
Merchant cash advances, revenue based financing, some short term loans
Why it matters
It hides the real yearly cost; a 1.3 factor over six months is roughly 100% APR or more

What is a factor rate?

A factor rate is a fixed multiplier applied to the amount you receive to set the total you pay back. Multiply the advance by the factor and you have your payback amount. Nothing else changes it: no compounding, no declining balance, and in most contracts no discount for paying early.

Providers use factor rates because cash advances are structured as a purchase of your future sales rather than a loan, so they are not required to show an APR. The number is honest about the total you owe, not about how expensive that is per year. See our merchant cash advance page for the product in full.

How is a factor rate calculated?

Multiply the advance by the factor rate to get the payback, then look at how long you have to repay to see the yearly cost.

  • You receive a $50,000 advance at a 1.3 factor rate.
  • Payback is $50,000 times 1.3, which is $65,000. The cost is $15,000.
  • The provider collects it over about six months through daily payments.
  • A $15,000 cost on $50,000 over six months, with the balance shrinking as you pay, converts to roughly 100% APR or higher.

A bank loan at 10% APR would cost about $1,500 in interest on the same $50,000 over six months. Our MCA true cost calculator converts your own numbers.

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What do lenders consider normal?

Factor rates typically run from about 1.1 to 1.5. Businesses with strong card sales, a year or more of history and clean bank statements typically see 1.1 to 1.25. Newer businesses, those with frequent overdrafts, or anyone stacking a second advance typically see 1.3 to 1.5.

Term length matters as much as the factor: a 1.2 repaid over 12 months costs far less per year than a 1.2 repaid over four. Ask for both numbers, and ask whether early payoff earns a discount, since a few providers offer one.

What should you watch for?

Watch for a factor rate presented as an interest rate. A provider who says "1.2, so just 20%" is skipping the part where you repay in months. Watch the holdback percentage and the daily payment too, because those decide whether your cash flow survives the term.

Also watch for origination fees on top of the factor: a $50,000 advance at 1.3 with a 5% fee means you receive $47,500 and repay $65,000. And read the renewal clause, since renewing early often means paying the factor on money you already repaid.

Related terms

A factor rate is the cash advance equivalent of APR, and converting between the two is the most useful comparison in business borrowing. It almost always comes with a holdback and short underwriting based on bank statements. You will see it on merchant cash advances and revenue based financing. You can apply here, or ask your AI assistant to compare an advance against a loan and apply for you through our MCP server.

Using Claude, ChatGPT, Gemini or Grok?Connect our MCP server and your assistant can collect your documents, fill the application, match lenders and submit.
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