Factor rates explained: what an MCA really costs

A factor rate is the number a funder multiplies your advance by to set the total you pay back. Multiply a $50,000 advance by a factor rate of 1.30 and you owe $65,000, so the money costs $15,000. That dollar cost is fixed the day you sign, but the yearly cost depends on how fast the funder collects it, which is why the same 1.30 can work out to about 55% a year on one advance and about 109% on another. Below we work through that math by hand, show how the New York and California disclosures express it, and cover the fees, payoff terms and renewal clauses that change what an advance really costs.

Owners have good reason to check. In the Federal Reserve's 2026 Small Business Credit Survey, 60% of businesses that borrowed from online lenders said their actual borrowing costs came in higher than they expected, and only 4% said lower. The survey asked them to count interest, fees, penalties and every other charge, which is the sum worth doing before you sign.

What is a factor rate?

A factor rate is written as a decimal, such as 1.18 or 1.45, instead of a percentage. It applies once, to the amount funded, and it does not shrink as you pay down the balance the way an interest rate would. NerdWallet's guide to factor rates puts the typical range at 1.1 to 1.5 and notes that the rate is fixed when you take the money. Funders set it from your file, including time in business, industry, deposits and any advances you are already repaying.

Factor rates belong mostly to merchant cash advances, which funders structure as a purchase of your future sales rather than a loan. Our post on whether merchant cash advances are legal explains that structure. On an offer letter, the factor rate is usually printed next to the two figures it connects, the purchase price (what you receive) and the purchased amount (what you repay).

How to turn a factor rate into total payback and cost

Multiply the amount funded by the factor rate to get the total payback. Subtract the amount funded from that total to get the dollar cost. If your letter shows the totals but leaves out the factor rate, divide the purchased amount by the purchase price and you have it. The digits after the decimal point tell you what each dollar costs, so a 1.30 factor rate means 30 cents for every dollar funded, however long repayment takes.

These are example figures, not quotes. The 30 cents in the 1.30 row covers the whole advance and says nothing yet about cost per year, which needs the payment and the term.

What is an MCA payment, and what sets the term?

The funder buys a share of your future deposits, called the specified percentage or holdback. Many funders turn that share into a fixed debit, taken every business day or once a week, based on your average deposits. If your account takes in about $108,000 a month across 21 business days and the specified percentage is 10%, the daily payment lands around $515. Divide the $65,000 total by $515 and you get about 126 business days, which is roughly six months.

Now picture a business with the same $50,000 advance at the same 1.30, but with deposits of about $54,000 a month. At 10%, its payment is about $258 a day, and the same $65,000 takes about 252 business days, or a year, to collect. On a weekly schedule, six months of payments on $65,000 is 26 debits of $2,500. New York's disclosure rule requires the funder to state whether daily payments run on weekdays or every calendar day, which changes both the payment count and the term.

When sales drop and a fixed payment does not, reconciliation is the clause that lets you ask for the payment to be brought back in line with the specified percentage. Our revenue-based financing page covers how these advances are sized and repaid.

Factor rate vs APR: why speed changes the cost

Both businesses above pay $15,000 for $50,000. The first pays it within six months and the second takes a year, so the first pays the same dollars for half as much time with the money. Here is the rough calculation you can do on paper for each of them.

1. Divide the dollar cost by the amount funded. For both businesses, $15,000 divided by $50,000 is 30%.
2. Divide that by the term in years. Six months is half a year, so the first business gets 60%. The second business repays over a full year and stays at 30%.
3. Adjust for the falling balance. Because the payments start on day one, you hold about half of the $50,000 on average across the term, so the cost of the money you actually have in hand comes out close to double the figure from step two.

Doubling gives a fast estimate. The full calculation, using the actuarial method set out in Appendix J of Regulation Z, comes out a little lower. Appendix J finds the rate per payment period that makes the payments equal the money received, then multiplies it by the number of periods in a year. We ran our example through that method, assuming equal payments on 252 business days a year.

Nothing about the contract differs between those rows except the speed of collection. The dollar cost tells you whether the advance pays for itself in the job or the inventory it funds. The annualized cost is the figure to hold up against a line of credit, an equipment loan or an SBA loan, all of which quote yearly rates. Put your own offer into the calculator below to see both.

How New York and California disclosures show an estimated APR

New York's commercial finance disclosure rule, 23 NYCRR 600, gives sales-based financing a fixed ten-row table. The rows cover the funding provided, the estimated APR, the finance charge, the estimated total payment, the estimated payment, the payment terms, the estimated term and two rows on prepayment. The APR has to be computed with Appendix J, and when the cost comes from fees instead of interest, the table has to say so in plain words: "APR is not an interest rate."

Every one of those figures rests on a guess about your future sales. Under the rule's historical method, the funder averages your past monthly sales over a fixed window of four to twelve months. Under the opt-in method, it uses its own internal projection. If your sales run slower than the estimate, the term stretches and the effective APR falls, and if they run faster, the APR rises. The disclosure itself warns that your effective APR may vary for that reason.

California's Department of Financial Protection and Innovation adopted a closely matching format, with an estimated APR row for sales-based financing, under regulations that took effect on December 9, 2022. The original law was set to drop the annualized rate at the start of 2024, and SB 33, signed in October 2023, kept it in place with no end date, as Orrick's summary of the bill explains. If your offer came with one of these disclosures, read it first.

Fees that change the real cost

The factor rate leaves out fees. Say the $50,000 advance carries a 3% origination fee of $1,500, taken out at funding. You receive $48,500 and still repay $65,000, so the cost is $16,500 on the money you actually got, an effective factor rate of about 1.34. On the six-month schedule, the rough annualized cost moves from about 109% to about 123%.

The New York table handles this in its first row. When deductions mean you receive less than the amount financed, the funder has to say how much reaches you directly and attach an itemization. Ask for the same breakdown on any offer, and get every charge in dollars, including origination, underwriting, administration, UCC filing and wire fees. The number that matters for your math is net funding, the amount that lands in your account.

Early payoff discounts

With a standard factor rate, paying early saves nothing, because the $65,000 is owed whether you clear it in four months or nine. Paying faster raises the annualized cost of the same dollars. Some contracts include an early payoff discount, which lowers the total owed if you finish within a set window. As an illustration, a 1.30 advance that drops to a 1.20 payback if cleared within 60 days would cost $60,000 instead of $65,000, saving $5,000.

The two prepayment rows in New York's table tell you whether paying early still leaves you owing all or part of the finance charge, and whether it triggers any extra fees. Get the discount schedule in dollars, written into the contract.

Renewals and double dipping

A renewal is a new advance that pays off the balance on your current one and sends you the difference. Suppose you have repaid $39,000 of the $65,000, which is 60%, and owe $26,000. If the fee is earned evenly as you pay, $6,000 of that remaining balance is the unpaid 40% of the original $15,000 fee. A funder then offers a $60,000 renewal at 1.30. It sends $26,000 to clear the old advance and $34,000 to you, and you now owe $78,000.

The $18,000 cost of the renewal is charged on the full $60,000, including the $26,000 that went to pay off the old balance. You were going to pay that $26,000 anyway, so the honest comparison is $18,000 of cost for $34,000 of new money, which works out to about 53 cents per new dollar. Part of the $26,000 was the old fee itself, and New York calls that double dipping. Its disclosure must answer whether a renewal includes any amount used to pay unpaid finance charges or fees, and for a fixed fee it counts the unpaid share pro rata, as in this example. Ask whether a renewal credits the unearned part of the old fee. If you are carrying more than one advance, our consolidation page explains how a single longer facility works instead.

How to compare two offers

In the example below, Offer A repays $72,500 at a 1.45 factor rate through about 120 daily debits of $604, and Offer B repays $66,000 at 1.32 through about 30 weekly payments of $2,200.

1. Write down the net funding for each offer. If Offer A carries the $1,500 fee shown on the example letter, it puts $48,500 in your account, while Offer B, assuming no fee, puts in the full $50,000.
2. Compare the dollar cost against that net figure. Offer A costs $24,000 for $48,500 and Offer B costs $16,000 for $50,000.
3. Test each payment against your slowest month of deposits, not your average one, because the debit runs whether or not the sales came in.
4. Run both through the calculator for a rough annualized cost. By our math, Offer A works out to about 181% over roughly 120 business days, and Offer B to about 99% over roughly seven months.
5. Read the early payoff, reconciliation and renewal terms on each, since a real discount or a reconciliation clause you can actually use can be worth more than a small gap in price.

We lay out the offers we bring back to owners this same way. If you already hold an offer, we can take it to the funders in our network and ask them to beat it, which our post on how we beat an MCA offer describes step by step.

To get offers of your own, start the short application and add four months of business bank statements, or send us the offer you already have. There is nothing to pay to see offers and no obligation to take one. If you would like to go through the numbers with someone first, call (818) 351-0225 or send our team a message.

Questions owners ask about factor rates

How do you calculate a factor rate?

Divide the total payback, sometimes called the purchased amount, by the amount funded. A $65,000 payback on a $50,000 advance is a 1.30 factor rate. To go the other way, multiply the amount funded by the factor rate to get the payback, then subtract the amount funded to get the dollar cost.

Is a 1.3 factor rate the same as 30% interest?

The two are different measures. A 1.3 factor rate charges 30 cents per dollar once, however long repayment takes, while an interest rate is a yearly charge on a balance that shrinks as you pay. Repaid over six months with daily payments, a 1.3 factor rate works out to an annualized cost of roughly 109%, and over twelve months to roughly 55%.

How do you convert a factor rate to APR?

You need the payment amount, how often it is taken and the number of payments, along with any fees deducted at funding. The APR is the yearly rate at which those payments exactly repay the money you received, calculated the way Appendix J of Regulation Z describes. New York and California require an estimated APR on the disclosure for sales-based financing, and the calculator in this post gives a rough figure for any offer.

What is a good factor rate for a merchant cash advance?

NerdWallet puts the typical range at 1.1 to 1.5, and where an offer falls depends on the funder and your file. Fees, the term and early payoff terms all change the real cost, so judge an offer on net funding, total payback and annualized cost together.

Does paying off a merchant cash advance early save money?

It saves money when the contract includes an early payoff discount. Without one, the full payback is owed whatever the timing, and New York's disclosure states whether paying early still leaves you owing the finance charge.

What is double dipping on an MCA renewal?

Double dipping is when a renewal's new funding is used partly to pay fees you had not yet paid on the old advance, so new fees are charged on old fees. New York requires the disclosure for a renewal to state whether that happens and how much is involved.