How do MCA factor rates work (and what's the real APR)?
Reviewed by Turan Zeynal, Managing Partner, Outset Funding Partners ·
A factor rate is a decimal multiplier — advance × factor rate = total payback. A $50,000 advance at a 1.30 factor means you repay $65,000 total. Factor rates are not APRs: the same 1.30 factor is roughly a 55% APR over 8 months or a 35% APR over 12 months. Shorter terms make the same factor more expensive.
Quick facts
- Typical factor range
- 1.15 – 1.50
- Example advance
- $50,000
- Example factor
- 1.30
- Total payback
- $65,000
- Cost of capital
- $15,000
- Est. APR at 8 months
- ≈ 55%
- Est. APR at 12 months
- ≈ 35%
- Early payoff discount
- Usually none
The 60-second answer
A factor rate looks simpler than an APR — one decimal number, no compounding math. That simplicity is why MCA funders quote it, and it's exactly what makes it easy to underprice the true cost in your head. The number to anchor on isn't the factor; it's the dollars repaid per month relative to how long you'll be paying.
The rule: for any given factor rate, a shorter payoff is a higher effective APR. If two funders quote you the same 1.30 factor but one collects it in 6 months and the other in 12, the 6-month deal is roughly twice as expensive on an APR basis. Always ask for the estimated payoff term alongside the factor.
How it works, step by step
- Calculate total paybackMultiply the advance by the factor rate. $50,000 × 1.30 = $65,000 total to repay.
- Calculate cost of capitalTotal payback minus advance. $65,000 − $50,000 = $15,000. That is the actual fee for the money.
- Estimate the payoff termDivide total payback by the daily payment × ~22 business days per month. A $325/day payment on $65,000 pays off in ~200 business days, or roughly 9 months.
- Translate to APRAPR ≈ (cost / advance) × (12 / months to payoff) × 100. For $15k / $50k / 9 months: (0.30)(1.33)(100) ≈ 40% APR. This is an estimate, not a legal APR calculation.
- Compare the APR — not the factor — across offersTwo 1.30 factors can be very different deals depending on term length. Always compare the APR estimate, not just the factor.
Why two identical factor rates can be very different deals
A factor rate is a total-cost multiplier, not a time-adjusted price — and that's exactly what makes it possible for a funder to quote a competitive-sounding 1.30 while structuring a deal that costs nearly twice as much as another 1.30 offer on the same file. The variable is the payoff term. The shorter the payoff, the more you're paying per unit of time for the same total fee. A 1.30 factor over 4 months is roughly a 100% APR; the same 1.30 factor stretched to 12 months lands around 35%. Same cost of money on paper — very different cost of money in reality.
This is where "short-term" offers do their damage. A short-term MCA at a modest-looking 1.18 factor is often more expensive per month than a longer-term deal at 1.32, because you're compressing the same fee into fewer weeks of revenue. When you receive multiple offers, sort them by daily debit and payoff term, not by factor rate. If two offers have the same total payback and the same holdback percentage, the one that pays off slower is the cheaper deal for your cash flow.
One more nuance: some funders build in an "early payoff" concession — often 15–30% off the remaining factor if you settle within 60–90 days. If your revenue is growing or you expect a large deposit, that option can meaningfully cut your effective APR. Always ask upfront whether a discount exists and get it in writing, because default MCA contracts assume none.
Same factor, different terms — real cost
| Option | When to use | Watch out for |
|---|---|---|
| 1.30 factor, 6 months | $50k → $65k total | ≈ 72% effective APR |
| 1.30 factor, 8 months | $50k → $65k total | ≈ 55% effective APR |
| 1.30 factor, 12 months | $50k → $65k total | ≈ 35% effective APR |
| 1.40 factor, 10 months | $50k → $70k total | ≈ 55% effective APR |
| 1.15 factor, 4 months | $50k → $57.5k total | ≈ 55% effective APR |
Frequently asked questions
What is a factor rate on an MCA?
A factor rate is a decimal multiplier applied to the advance amount to calculate the total payback. A 1.30 factor on a $50,000 advance means $65,000 total is repaid, regardless of how quickly or slowly it's paid.
Is a factor rate the same as an APR?
No. A factor rate is a fixed total cost, while an APR annualizes cost over time. The same 1.30 factor can translate to a 35% APR over 12 months or a 70%+ APR over 6 months — the shorter the term, the higher the effective APR.
Do I save money by paying off an MCA early?
Usually no. Because factor rates are fixed at the start, most MCA funders collect the full payback amount even if you prepay. A handful of funders offer partial discounts for early payoff — always ask upfront.
What is a good factor rate for a merchant cash advance?
For a first-time MCA on a healthy business with 12+ months of history and 600+ credit, factor rates from 1.18 to 1.28 are competitive. Above 1.40 usually indicates higher-risk underwriting or short-term positions.
How is the factor rate decided?
Funders weigh time in business, average monthly revenue, number of negative days on bank statements, industry risk, and whether other MCAs are already in place. Stronger files earn lower factors.
Sources
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