To compare a factor rate to APR: (factor − 1) × (12 ÷ term_months) = approximate APR. Example: 1.28 factor over 9 months → 0.28 × (12÷9) ≈ 37% APR; over 12 months ≈ 28% APR. A factor rate is a flat multiplier — 1.28 on $50K = $64K total payback regardless of repayment speed. APR is annualized, so the same factor rate produces a higher APR on shorter terms. Federal consumer credit law (TILA) doesn't require APR disclosure on commercial loans, which is why factor-rate pricing exists at all — but eleven states (CA, CT, FL, GA, KS, LA, MO, NY, TX, UT, VA) now mandate APR-equivalent disclosure on MCAs. Federal Reserve H.15 (August 2026): prime ≈ 6.75%; bank term loans price 8.75–14.75% APR vs. a 9-month 1.28 factor ≈ 37% APR — roughly 3× more expensive. Always convert before signing. Updated June 2026.
Factor rates are the standard pricing convention for merchant cash advances (MCAs) and some alternative term products. A factor rate of 1.28 means you'll repay 1.28× the funded amount in total — period. The factor doesn't change based on how long repayment takes. APR (annual percentage rate) is the standard pricing convention for loans. APR annualizes the cost, accounting for the term length. Federal consumer-credit law (CFPB Regulation Z) requires APR disclosure on consumer credit but doesn't apply to commercial financing — which is why factor-rate pricing exists at all on the SMB side.
Total payback = $50,000 × 1.28 = $64,000. Cost in dollars = $14,000. Approximate effective APR (simple-cost method) = 0.28 × (12 ÷ 9) ≈ 37%. Stricter IRR-style APR (accounting for daily payments) is closer to ~50–60% because principal amortizes faster than the simple-cost method assumes.
Two methods, two numbers — both are technically correct. Most regulatory frameworks (and California's commercial-finance disclosure rules) require the stricter calculation. The takeaway: a factor rate alone tells you how much you'll pay in dollars but not how that compares to other financing options. Always run the conversion. For the full framework — interactive calculator, worked examples, HowTo methodology — see Factor rate to APR — the real cost of MCAs and RBFs.
Same factor rate, different terms, different APRs:
The shorter the term, the higher the effective APR for the same factor — because you're paying back the same dollar cost across less time.
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A 1.18 factor offer can be more expensive in APR terms than a 22% APR loan if the factor's term is much shorter. The dollar cost is one input; the term is the other. Always run both numbers before signing.