Guide
APR versus factor rate: how to compare offers that are priced differently on purpose
A 1.3 factor rate and a 30% APR are not the same thing, and the gap between them is where most of the money in this industry is made.
The two ways price gets quoted
- Interest rate and APR
- Interest accrues on the balance you still owe, so it falls as you repay. APR bundles interest plus mandatory fees into one annualized number. It is time-aware, which is the point.
- Factor rate
- A flat multiplier on the amount advanced. 1.3 on $50,000 means $65,000 owed. It contains no information about time, which is exactly why it is used.
A factor rate is not a bad-faith number in itself. It is a genuinely simple way to express the cost of a short-term advance. The problem is that it is not comparable to anything else, and the shorter the term, the more flattering it looks.
The same fee, four different costs
| Advance | Factor | Fee | Repaid over | Approximate APR |
|---|---|---|---|---|
| $50,000 | 1.25 | $12,500 | 24 months | ~23% |
| $50,000 | 1.25 | $12,500 | 12 months | ~46% |
| $50,000 | 1.25 | $12,500 | 6 months | ~95% |
| $50,000 | 1.25 | $12,500 | 3 months | ~195% |
The reason the APR climbs is that you are repaying principal throughout, so your average outstanding balance is roughly half the original. You pay a full 25% fee for the use of, on average, half the money, for a fraction of a year.
How to convert a factor rate yourself
Approximate APR ≈ (Factor − 1) ÷ (Term in months ÷ 12) × 2
The ×2 accounts for repaying principal throughout, so you only have about half the money for the full period. It is an estimate, not a disclosure — but it gets you close enough to make a decision.
Worked: a 1.30 factor over 9 months. (1.30 − 1) = 0.30. 9 ÷ 12 = 0.75. 0.30 ÷ 0.75 = 0.40. × 2 = 80% APR, approximately. Our factor rate converter does this and adds origination fees.
The three questions that make any offer comparable
- How much lands in my bank account? Not the approved amount — the net after origination, underwriting, and any fee deducted at funding.
- What is the total of every payment I will make? Add them up. All of them.
- Over what period, and can I shorten it by paying early? If early repayment does not reduce what you owe, the stated term is the only term.
Those three numbers let you compare an SBA loan, a bank term loan, an online loan, a factoring arrangement, and a merchant advance on one line. Nothing else does.
Fees that change the real number
- Origination fee deducted at funding. A 3% fee on $100,000 means $97,000 arrives while you repay on $100,000. That is not 3% — over a one-year term it is closer to 6% APR added.
- Daily or weekly payments. Same nominal rate, higher effective cost, because you lose the money sooner.
- Fixed total payback. No saving from early repayment, which raises the effective cost of any early exit to something close to infinite.
- Stacked fees. Underwriting, documentation, ACH, servicing, monthly maintenance. Individually trivial, collectively material.
Questions people actually ask
Is a 1.2 factor rate good?
Only in context of time. Over 24 months a 1.2 factor is around 20% APR, which is reasonable for fast unsecured money. Over 4 months the same 1.2 is roughly 120% APR. The factor alone tells you nothing.
Why do lenders use factor rates instead of APR?
Partly because it genuinely is simpler for very short terms, and partly because it looks smaller. There is also a legal dimension: merchant cash advances are structured as purchases rather than loans, so lending disclosure rules historically did not apply — though several states have now passed commercial financing disclosure laws requiring APR-equivalent disclosure.
Does paying off a factor-rate advance early save money?
Usually not. The full payback is typically owed regardless. Some funders offer a discretionary early-payoff discount. If early repayment is part of your plan, negotiate that discount into the contract before signing, because it will not be there by default.