Factor rate vs APR: what an advance actually costs

A factor rate is a flat multiplier. At 1.3 on $50,000, you repay $65,000, and the $15,000 difference is the entire cost of the money. It does not accrue, it does not change, and it is set the day you sign. That simplicity is genuinely useful. It is also what makes the number so easy to misread.

Why 1.3 does not mean 30 percent a year

Two things separate the factor rate from an annualized cost.

The term is short. Thirty percent paid over six months is not the same as thirty percent paid over twelve. Compressing the same dollar cost into half the time roughly doubles what it costs you on an annual basis.

You start repaying immediately. With daily or weekly withdrawals, you never have use of the full $50,000 for the full term. By the midpoint you are down to roughly half, and the average balance you actually have working in the business over the whole period is around half the original amount. Paying $15,000 for average use of about $25,000 is a very different proposition than paying $15,000 for use of $50,000.

Put those together and a 1.3 factor over about six months lands in the rough range of 90 to 130 percent on an annualized basis, depending on the exact schedule and any origination fees. That is not a trick and it is not necessarily wrong for your situation, but it is the number you need in order to compare it against a term loan quoted at 28 percent.

Converting one yourself

You do not need a spreadsheet for a working estimate. Take the cost as a share of the amount advanced ($15,000 on $50,000 is 30 percent). Divide by the term in years (six months is 0.5, so 60 percent). Then roughly double it to account for repaying as you go. That puts you near 120 percent, which is close enough to compare against any other offer on the table.

The one caution: run this on the amount that actually lands in your account. If an origination fee comes off the top, the money you can use is smaller than the number on the agreement, and the real cost is proportionally higher.

The comparison that actually matters

Annualized cost is the right way to compare price, but it is not the only thing worth comparing, and for many businesses it is not the deciding factor.

Total dollars out. Sometimes the honest answer is that a more expensive product costs fewer real dollars because the term is shorter. Compare the total, not just the rate.

The payment against your slowest week. This is the one that decides whether the financing helps or hurts. A payment your best month absorbs easily and your slowest month cannot is how the pattern in the MCA stacking cycle begins. Size every offer against your worst realistic stretch, not your average.

What happens if you need more later. An advance secured by a UCC filing shapes what you can do for the rest of its term, as covered in getting funded when you already have an MCA.

Questions worth asking before signing

What is the total payback amount in dollars? What comes out per day or per week, and on which days? What is deducted up front, and what actually lands in my account? Is there any discount for early payoff, and is it in writing? Is there a UCC filing? What happens in a week where the account cannot cover the payment?

A funder who answers all six plainly is one worth working with. Hesitation on any of them is information.

Common questions

This page is general education, not financial or legal advice. The conversions above are approximations meant for comparing offers; exact figures depend on the payment schedule, fees, and terms of a specific agreement.