A factor rate tells you how much you will repay in total. APR tells you what that money costs per year. A factor rate of 1.3 sounds like 30%, but on a 9-month advance with daily payments it works out to about 73% APR. To compare a factor rate with a loan rate, convert it to APR using the payment schedule.
What each number measures
Factor rate is a multiplier on the amount advanced. Ramp's example: a $50,000 advance at 1.3 repays $65,000, a $15,000 finance charge. SCORE notes factor rates for merchant cash advances and similar short-term funding usually range from 1.1 to 1.5. The factor rate ignores time. A 1.3 advance costs $30,000 per $100,000 whether you repay it in 4 months or 14.
APR, or annual percentage rate, is the yearly cost of the money including fees, based on how much you owe and for how long. Time is built in. That is why APR is the standard for comparing financing.
Regulators now require APR on many advances. New York's Commercial Finance Disclosure Law requires an APR on offers of $2.5 million or less, calculated under the actuarial method or the United States Rule. California's rules, effective December 9, 2022, require an APR for loans, lines, factoring and merchant cash advances.
The worked example: $100,000 at 1.3 over 9 months
Step 1: total repayment. $100,000 × 1.3 = $130,000. The finance charge is $30,000.
Step 2: payment schedule. Nine months is about 189 business days (21 a month). $130,000 ÷ 189 = $687.83 per business day.
Step 3: the shortcut most people use. $30,000 is 30% of $100,000. Spread over 9 months, that is 30% × 12 ÷ 9 = 40% a year. SCORE uses this simple method in its own example. It understates the cost, because it assumes you owe the full $100,000 for the whole 9 months.
Step 4: the real APR. You start repaying the next business day, so your balance falls every day. The APR is the daily rate that makes 189 payments of $687.83 equal the $100,000 you received, multiplied by 252 business days. Solved, that daily rate is about 0.29%, and the APR is 73.0%.
Step 5: add any fee withheld at funding. If the funder withholds a $3,000 fee and you receive $97,000, the same payments now buy less money. The APR rises to 82.0%.
| Method | Annual cost |
|---|---|
| Factor rate alone | "1.3" (no time element) |
| Simple annualisation | 40.0% |
| True APR, daily payments | 73.0% |
| True APR, daily payments, $3,000 fee withheld | 82.0% |
Why the APR is nearly double the shortcut
On a loan, you borrow the money and pay it back over time. Your average balance across the term is about half of what you borrowed. A $30,000 cost on an average balance of roughly $50,000 over three quarters of a year is far more than 40% a year. The real APR captures that. The simple method does not.
Factor rate to APR, at a glance
APRs below assume a $100,000 advance, equal daily payments on 21 business days a month, and no fees withheld.
| Factor rate | Term | Total repayment | Daily payment | Simple annual | True APR |
|---|---|---|---|---|---|
| 1.15 | 6 months | $115,000 | $912.70 | 30% | 56.9% |
| 1.20 | 6 months | $120,000 | $952.38 | 40% | 74.8% |
| 1.30 | 4 months | $130,000 | $1,547.62 | 90% | 163.4% |
| 1.30 | 6 months | $130,000 | $1,031.75 | 60% | 109.3% |
| 1.30 | 9 months | $130,000 | $687.83 | 40% | 73.0% |
| 1.30 | 12 months | $130,000 | $515.87 | 30% | 54.8% |
| 1.40 | 12 months | $140,000 | $555.56 | 40% | 71.3% |
Two patterns stand out. The same factor rate gets more expensive the faster you repay. And a lower factor rate is not always cheaper per year: 1.20 over 6 months (74.8%) costs more per year than 1.30 over 9 months (73.0%).
Weekly payments change the number a little
Weekly debits instead of daily lower the APR slightly, because each dollar stays with you a few days longer. The $100,000 at 1.3 over 9 months, paid as 39 weekly payments of $3,333.33, works out to 71.8% APR instead of 73.0%.
Sales-based payments change the term
Many advances are repaid as a percentage of daily sales, so the term is an estimate. If sales run hot, you repay faster and the APR rises. If sales slow, you repay slower and the APR falls, while the total repayment stays the same. That is why New York and California disclosures for sales-based financing show an estimated APR built on projected sales. Ask your broker which term the estimate assumes.
When a factor rate still makes sense
High APR does not automatically mean a bad deal. A short advance can make sense when:
- The money funds something that returns more than its cost quickly, like inventory for a confirmed order
- You need funds in a day or two and no cheaper option can close in time
- Card sales are strong and a percentage-of-sales payment protects you in a slow week
What matters is seeing the cost clearly. The Federal Reserve's 2025 Small Business Credit Survey found that 60% of firms that borrowed from online lenders reported higher than expected borrowing costs. Converting factor rates to APR before you sign is the simplest way to avoid joining them.
How to compare a factor rate with a loan
Line up both offers in dollars and APR:
| Merchant cash advance | Term loan | |
|---|---|---|
| Amount | $100,000 | $100,000 |
| Pricing | 1.30 factor, 9 months daily | 18% interest, 24 months monthly, 2% fee |
| Total cost | $30,000 | $21,817.84 |
| APR | 73.0% | 20.1% |
The term loan costs less in dollars and far less per year, but pays out slower and needs stronger credit. The full walkthrough is in comparing loan offers.
Ask your broker for the APR
Any broker can calculate APR from a payment schedule in a minute. Ask for it on every offer, alongside total repayment and the payment amount. Verified entries on the register show fees in writing, and brokers who specialise in merchant cash advances see these numbers every day. For the full picture on advances, read the true cost of a merchant cash advance.
Questions owners ask
What is a factor rate?
A multiplier that sets total repayment. A $100,000 advance at a 1.3 factor rate repays $130,000. SCORE says factor rates usually range from 1.1 to 1.5.
Can I convert a factor rate to APR?
Yes, if you know the payment amount, frequency and expected term. The APR is the yearly rate that makes those payments equal the cash you received.
Why is the APR so much higher than the factor rate suggests?
Because you repay quickly and from day one. Your average balance is roughly half the advance, so the same dollar cost is spread over much less borrowed money per year.
Sources
- SCORE, The 411 on factor rates
- Ramp, A guide to merchant cash advances
- National Law Review, Compliance guidelines for the New York Commercial Finance Disclosure Law
- California DFPI, Commercial financing disclosure regulations effective December 9, 2022
- Federal Reserve Community Development, Key insights from the 2025 Small Business Credit Survey