What Is a Factor Rate?
A factor rate is a decimal number that gets multiplied by your loan amount. It tells you the total you will pay back. That is it.
Factor rates typically range from 1.10 to 1.50 for short-term business funding. The number is fixed. It does not change over time. It does not go up or down based on your balance.
Here is a simple example. You borrow $50,000 at a 1.30 factor rate. Multiply $50,000 by 1.30. You owe $65,000 total. The cost of borrowing is $15,000.
Key point: A factor rate is not an interest rate. It is a flat multiplier. The total cost is locked in the moment you sign. Paying early does not reduce what you owe unless the lender offers a specific prepayment discount.
Factor rates are most common on merchant cash advances (MCAs) and short-term business funding products. They exist because these products are designed for speed and flexibility, not long-term borrowing.
The factor rate itself does not tell you how expensive the loan is compared to other options. A 1.30 factor rate on a 6-month term costs much more than a 1.30 factor rate on a 12-month term when you look at the annualized cost. We will cover that conversion later.
What Is an Interest Rate?
An interest rate charges you a percentage based on your remaining balance over time. As you make payments and reduce what you owe, the amount of interest you pay each month goes down.
This is how traditional business loans, SBA loans, lines of credit, and most bank products work. You pay interest only on what you still owe.
Here is an example. You borrow $50,000 at 12% APR for 3 years. Your monthly payment is about $1,661. In month one, roughly $500 goes to interest and $1,161 goes to principal. By month 30, only about $50 goes to interest because you have already paid down most of the balance.
Over the full 3 years, you pay about $9,800 in total interest. That is the key difference. With an interest rate, time is your friend. The longer you have already been paying, the less interest you owe.
Key point: Interest rates reward early payoff. If you pay off a 12% APR loan in 18 months instead of 36, you save thousands in interest. Factor rates do not work this way.
Factor Rate vs Interest Rate: Side-by-Side Comparison
These two pricing models look similar on paper but work very differently in practice. Here is how they compare across every metric that matters.
| Feature | Factor Rate | Interest Rate |
|---|---|---|
| How cost is calculated | Flat multiplier on original amount | Percentage charged on remaining balance |
| Total cost known upfront? | Yes - fixed from day one | Estimated - depends on payment timing |
| Early payoff savings | Usually none (some lender exceptions) | Yes - less time means less interest |
| Typical term length | 3 to 18 months | 1 to 25 years |
| Payment frequency | Daily or weekly ACH | Monthly |
| Common rate range | 1.10 to 1.50 | 7% to 30% APR |
| Speed to fund | 1 to 3 business days | 2 weeks to 90 days |
| Qualification difficulty | Lower - credit scores as low as 500 | Higher - typically 650+ for best rates |
| Best for | Short-term cash needs, speed, lower credit | Long-term growth, lower total cost |
The Real Cost Difference: $50K Loan Comparison
Numbers tell the story better than words. Let us compare the exact same $50,000 loan funded two different ways.
Option A: Factor Rate MCA
- Loan amount: $50,000
- Factor rate: 1.30
- Term: 6 months (130 business days)
- Total payback: $65,000
- Total cost of borrowing: $15,000
- Daily ACH payment: $500
Option B: Interest Rate Term Loan
- Loan amount: $50,000
- Interest rate: 12% APR
- Term: 3 years (36 months)
- Total payback: $59,798
- Total cost of borrowing: $9,798
- Monthly payment: $1,661
The factor rate option costs $5,202 more in total. But it also delivers the money in 2 days instead of 3 to 6 weeks. And it qualifies borrowers with credit scores as low as 500 instead of 650+.
Payment Schedule Comparison
| Month | Factor Rate MCA (Daily ACH) | Interest Rate Term Loan (Monthly) |
|---|---|---|
| Month 1 | $10,500 (21 business days x $500) | $1,661 |
| Month 2 | $10,500 | $1,661 |
| Month 3 | $10,500 | $1,661 |
| Month 4 | $10,500 | $1,661 |
| Month 5 | $10,500 | $1,661 |
| Month 6 | $12,000 (remaining balance) | $1,661 |
| Months 7-36 | $0 (paid off) | $1,661/month |
| Total Paid | $65,000 | $59,798 |
Key Takeaway
The factor rate costs more in total dollars. But it also gets paid off in 6 months. The term loan is cheaper overall but takes 3 years of monthly payments. Which one is "better" depends on your situation, not the rate type alone.
How to Convert a Factor Rate to APR
Factor rates and interest rates use different math. To compare them fairly, you need to convert the factor rate into an APR (Annual Percentage Rate). Here is the formula:
Factor Rate to APR Formula: APR = (Factor Rate - 1) / Term in Years x 100
Example: A 1.30 factor rate on a 6-month term. That is (1.30 - 1) / 0.5 = 0.60. Multiply by 100. The approximate APR is 60%.
That sounds shocking. But remember: this is an annualized rate for a product that only lasts 6 months. You never actually pay 60% of the loan amount. You pay 30% ($15,000 on a $50,000 loan). The APR just helps you compare it against products with traditional interest rates.
Factor Rate to APR Quick Reference Table
| Factor Rate | 3-Month Term | 6-Month Term | 12-Month Term |
|---|---|---|---|
| 1.15 | 60% APR | 30% APR | 15% APR |
| 1.20 | 80% APR | 40% APR | 20% APR |
| 1.25 | 100% APR | 50% APR | 25% APR |
| 1.30 | 120% APR | 60% APR | 30% APR |
| 1.40 | 160% APR | 80% APR | 40% APR |
| 1.50 | 200% APR | 100% APR | 50% APR |
Pro Tip: The term length matters just as much as the factor rate. A 1.25 factor on a 12-month term (25% APR) costs less than a 1.15 factor on a 3-month term (60% APR) when compared annually. Always ask about both the rate and the term.
This table is a simplified estimate. The actual APR can vary based on fees, payment frequency (daily vs weekly), and whether the lender charges origination fees. But it gives you a reliable starting point for comparing offers.
Which Loan Products Use Which Rate Type
Not all business loans use the same pricing. Here is the breakdown by product type.
Products That Use Factor Rates
- Merchant cash advances (MCAs): Almost always factor rates. Terms from 3 to 18 months. Factor rates typically range from 1.10 to 1.50.
- Short-term business loans: Many short-term lenders price using factor rates, especially for terms under 12 months.
- Revenue-based financing: Some providers use factor rates or a hybrid model where cost is fixed but payment amount adjusts with revenue.
Products That Use Interest Rates
- Term loans: Traditional bank loans and online lenders use annual interest rates. Terms from 1 to 10 years. Rates from 7% to 30% APR.
- SBA loans: Government-backed loans always use interest rates. Rates tied to Prime + spread. Currently around 10% to 13.5% APR depending on the program.
- Lines of credit: Interest charged only on the amount drawn, not the full credit limit. Rates from 8% to 25% APR.
- Equipment financing: Collateral-backed loans with fixed or variable interest rates. Rates from 7% to 35% APR depending on credit.
Rule of thumb: If a product funds in under a week and does not require tax returns, it probably uses a factor rate. If it takes 2+ weeks and requires full financials, it probably uses an interest rate.
Cash Flow Impact: Daily ACH vs Monthly Payments
The rate type also determines how you pay. And how you pay affects your cash flow every single day.
Factor rate products usually require daily ACH debits from your business checking account. That means money leaves your account every business day. Interest rate products typically have monthly payments.
Here is what that looks like on our same $50,000 loan:
| Metric | Factor Rate MCA (Daily ACH) | Interest Rate Term Loan (Monthly) |
|---|---|---|
| Payment amount | $500/day | $1,661/month |
| Monthly cash impact | ~$10,500/month | $1,661/month |
| Payment frequency | Every business day (Mon-Fri) | Once per month |
| Cash flow predictability | Daily drain - harder to plan around | One payment - easier to budget |
| Account balance needed | Must maintain daily buffer | Only need funds once per month |
The daily ACH payment of $500 adds up to roughly $10,500 per month. That is more than 6 times the monthly term loan payment. Your business needs consistent daily revenue to support those withdrawals without running into overdraft issues.
Some factor rate lenders offer weekly payments instead of daily. Weekly payments reduce the frequency but keep the same total cost. If you have a choice, weekly payments give you more breathing room between debits.
Pro Tip: Before accepting a daily ACH product, look at your last 3 months of bank statements. Find your lowest daily balance. If your daily payment would push that balance below zero even once, the term is too aggressive. Ask for a longer term or a smaller amount.
When Factor Rates Make Sense
Factor rate products get a bad reputation. Some of it is earned. But there are real scenarios where a factor rate is the right tool for the job.
1. Emergency Capital Needs
Your walk-in freezer died. Your delivery truck broke down. A pipe burst in your restaurant. You need $30,000 by Friday. A bank loan takes 3 to 6 weeks. An MCA with a factor rate funds in 1 to 2 days. The higher cost is the price of speed, and sometimes speed is what keeps you open.
2. Seasonal Businesses Bridging Gaps
A landscaping company needs to hire crews and buy supplies in March for the busy season that starts in May. Revenue is low right now but will triple in 60 days. A 4-month factor rate product bridges the gap and gets paid off with spring revenue. A 3-year bank loan is overkill for a seasonal cash flow problem.
3. Businesses with Challenged Credit
A restaurant owner with a 520 credit score does not qualify for a bank loan. Period. But they have $80,000 in monthly revenue and 3 years in business. Factor rate products look at revenue first and credit second. For business owners rebuilding credit, this may be the only option on the table.
4. Short-Term Inventory Purchases
A retailer gets a bulk discount on inventory if they pay upfront. The deal saves them $20,000, but they need $50,000 today. A factor rate of 1.20 on a 3-month term costs $10,000. They net $10,000 in savings even after paying the factor rate. The math works because the funding has a clear, immediate return.
Key Takeaway
Factor rates make sense when the funding solves a time-sensitive problem that generates more revenue than the cost of borrowing. They do not make sense for long-term growth projects, debt consolidation, or situations where a cheaper product is available.
- Speed is critical and a bank loan would take too long
- The use of funds will generate more than the cost of borrowing
- Credit score or documentation limits your options
- The term is short enough that total dollar cost stays manageable
What to Watch Out For
Factor rate products can be helpful. They can also be dangerous if you do not understand the terms. Here is what catches people off guard.
Stacking Multiple Advances
Some business owners take a second or third MCA before paying off the first. Each one adds another daily payment. Three advances at $300/day each means $900 leaving your account every business day. That is $18,900 per month in payments alone. This is the most common way businesses get into trouble with factor rate products.
Warning: If you are already paying back one factor rate product and considering another, talk to a broker first. There may be a consolidation option that lowers your total daily payment instead of adding to it.
No Early Payoff Benefit
With most factor rate products, paying early does not save you money. If you owe $65,000 total, you owe $65,000 whether you pay it back in 4 months or 6 months. Some lenders do offer prepayment discounts, but you have to ask. Do not assume you will save by paying ahead of schedule.
Misleading Rate Comparisons
A factor rate of 1.20 sounds low. But on a 3-month term, the equivalent APR is 80%. Some lenders advertise factor rates without clearly explaining the term length or payment frequency. Always ask: "What is my total payback amount, and over how many months?"
Origination Fees on Top of Factor Rates
Some lenders charge origination fees (typically 2% to 10%) in addition to the factor rate. These fees get deducted from your funding amount. So a $50,000 advance with a 5% origination fee only puts $47,500 in your account, but you still owe $65,000 back. This makes the effective cost even higher.
Predatory Contract Terms
Watch for confession of judgment clauses, personal guarantee requirements that go beyond the business, and automatic renewal provisions. Read the contract. If you do not understand something, ask. A good broker will walk you through every line before you sign.
Pro Tip: Ask these three questions before signing any factor rate agreement: (1) What is my total payback amount? (2) Are there any fees deducted from my funding before I receive it? (3) Is there a prepayment discount if I pay early?
Frequently Asked Questions
What is a factor rate?
A factor rate is a decimal number (like 1.20 or 1.35) that gets multiplied by your loan amount to determine the total you owe. If you borrow $50,000 at a 1.30 factor rate, you pay back $65,000. The cost is fixed from day one and does not change if you pay early or late.
What is the difference between a factor rate and an interest rate?
An interest rate charges you based on your remaining balance over time. As you pay down the loan, you owe less interest. A factor rate multiplies your original loan amount by a fixed number. The total cost is locked in from the start and does not decrease if you pay early.
How do you convert a factor rate to APR?
Use this formula: APR = (Factor Rate - 1) / Term in Years. For example, a 1.30 factor rate on a 6-month term: (1.30 - 1) / 0.5 = 60% APR. Shorter terms produce higher APRs because you are paying the same cost over less time.
Is a factor rate always more expensive than an interest rate?
Not always, but usually yes. Factor rate products are short-term (3 to 18 months) and carry higher costs than traditional bank loans. However, they also fund faster and have lower qualification requirements. The real comparison is total dollar cost and whether the funding generates enough revenue to justify it.
Do you save money by paying off a factor rate early?
Usually no. Most factor rate products require you to pay the full amount regardless of when you pay it off. Some lenders offer prepayment discounts, but these are not automatic. Always ask about early payoff terms before signing.
Which business loan products use factor rates?
Merchant cash advances (MCAs) and some short-term business loans use factor rates. Traditional bank loans, SBA loans, lines of credit, and equipment financing typically use interest rates. Revenue-based financing sometimes uses a hybrid model.
What is a good factor rate for a business loan?
Factor rates for short-term business funding typically range from 1.10 to 1.50. Rates below 1.20 are considered strong. Rates between 1.20 and 1.35 are average. Anything above 1.40 is expensive and usually reserved for higher-risk profiles. Your rate depends on credit score, revenue, time in business, and industry.
Can I negotiate a factor rate?
Yes. Working with a broker gives you access to multiple lenders competing for your deal. Stronger credit profiles, higher revenue, and longer time in business all give you leverage to negotiate lower factor rates. A broker can also shop your deal across 20 or more lenders to find the best rate.
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