Glossary

What is a factor rate?

A factor rate is the pricing multiplier used in merchant cash advance (MCA) products. Instead of an interest rate, the funder applies a factor (commonly 1.1 to 1.5) to the advance amount to determine the total payback. A $50,000 advance at a 1.3 factor means the business repays $65,000 total, regardless of how quickly it is repaid.

How factor rate works

Factor rate is a flat multiplier — it does not compound over time like an interest rate. If repayment is accelerated, the total cost stays the same (the full factored amount is owed). This is structurally different from a loan, where paying early reduces total interest paid.

Total repayment = Advance amount × Factor rate. A $100,000 advance at 1.35 means $135,000 total repayment, regardless of timeline.

Factor rate vs APR

Factor rates cannot be directly compared to APRs without converting. Because MCA repayment is drawn daily from sales, the effective annualized cost depends on how fast the advance is repaid. State commercial financing disclosure laws in New York and California now require funders to disclose an estimated APR equivalent, making transparency a compliance requirement.

FAQ

Factor Rate — common questions

What is a typical factor rate?

Factor rates for MCA products commonly range from 1.1 to 1.5, though rates outside this range exist. The rate reflects the funder's assessment of risk, the advance term, and market conditions.

Why do MCAs use factor rates instead of interest rates?

MCAs are structured as purchases of future receivables, not loans. Factor rates fit that structure — a fixed purchase price for a defined stream of future revenue. Interest rates apply to debt; factor rates apply to receivables purchases.

Merchant cash advance (MCA) Ability to repay

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