True Cost
How to convert factor rate to APR — the real cost of MCAs and RBFs
Convert any merchant cash advance or revenue-based-financing factor rate to APR with the formula (factor − 1) × (12 ÷ term months) × 100 — plus worked examples and the math vendors don't show you.
Why factor rates mislead — and why APR is the better metric
Factor rates are quoted because federal Truth-in-Lending Act disclosure rules don't apply to commercial financing — MCAs are legally structured as the purchase of future receivables, not loans. The result is that two offers can be priced in completely different units. A "1.28 factor over 9 months" sounds smaller than a "68% APR" because the number is smaller, but with a debit every business day they describe the same offer.
The deeper problem is that factor rates ignore time. A 1.28 factor over 6 months and a 1.28 factor over 12 months cost the same dollars, but the 6-month version is twice as expensive in APR-equivalent terms because the money is tied up half as long. APR forces time into the math; factor rates hide it.
Eleven states had a commercial financing disclosure law in effect as of October 10, 2026, but only California (SB 1235) and New York (S5470B) require the disclosure on a covered MCA to state an APR. Those rules work from the payments a business is expected to make, which is what the amortizing APR below does; each state sets its own exact method.
Step-by-step methodology
- Confirm the factor rate, advance amount, and projected term. From the funder's offer letter or term sheet, pull three numbers: the advance (e.g., $50,000), the factor rate (e.g., 1.28), and the projected payback term in months (e.g., 9). The term is projected because daily/weekly debits float against actual revenue.
- Calculate total payback and cost of capital. Total payback = advance × factor. Cost of capital = total payback − advance. For $50,000 at 1.28: total payback $64,000, cost of capital $14,000. Add any origination fee on top.
- Convert to simple-cost APR. Simple-cost APR ≈ (factor − 1) × (12 ÷ term months) × 100. For 1.28 over 9 months: 0.28 × (12 ÷ 9) × 100 ≈ 37%. This is the number to compare against vendor-quoted APRs on other offers.
- Calculate effective (amortizing) APR. The simple-cost figure treats the full advance as outstanding for the whole term. To count the principal you repay along the way, solve for the periodic rate r that makes the remittances repay the advance — advance = payment × (1 − (1 + r)^−N) ÷ r — and multiply r by the number of periods in a year. For $50,000 at 1.28 repaid in 189 equal business-day debits of about $339, the amortizing APR is about 68% (about 67% with weekly debits). As a rule of thumb it is roughly 1.8× the simple-cost APR. This is the apples-to-apples comparison to a term loan. For your own numbers, use the factor rate to APR calculator, which runs the same math.
- Compare against a term-loan benchmark. A $50,000 term loan at an illustrative 10% APR, repaid in equal monthly payments over 9 months, costs about $2,106 in interest. The MCA's $14,000 cost is about $11,894 more — the dollar gap that determines whether refinancing pencils.
Worked examples
Same factor rate, different terms, very different APRs.
| Scenario | Inputs | Outputs |
|---|---|---|
| Mid-market 9-month MCA | $50,000 advance · 1.28 factor · 9 months · fixed-daily | Total payback $64,000 · Cost $14,000 · Simple APR ~37% · Effective APR ~68% |
| Same factor, longer term | $50,000 advance · 1.28 factor · 18 months · fixed-weekly | Total payback $64,000 · Cost $14,000 · Simple APR ~19% · Effective APR ~34% — same dollars, half the APR |
| Short-term high-factor advance | $25,000 advance · 1.45 factor · 6 months · fixed-daily | Total payback $36,250 · Cost $11,250 · Simple APR ~90% · Effective APR ~158% |
| Revenue-share RBF with fee | $100,000 advance · 1.32 factor · 12 months · 15% holdback · 2.5% origination fee | Total payback $132,000 + $2,500 fee · Simple APR ~34.5% · Effective APR ~63% if sales repay it in equal weekly amounts over the 12 months (faster repayment raises the APR, slower lowers it) |
| Best-case clean file | $75,000 advance · 1.18 factor · 12 months · fixed-daily | Total payback $88,500 · Cost $13,500 · Simple APR ~18% · Effective APR ~34% — the low end of the factor-rate range on this page |
Common factor rates and their APR equivalents
Simple-cost APR by factor × term. For the effective (amortizing) APR with equal daily or weekly debits, multiply by roughly 1.8 — the exact ratio runs from 1.6× to 1.9× across this grid.
| Factor | 6 mo | 9 mo | 12 mo | 18 mo |
|---|---|---|---|---|
| 1.15 | 30% | 20% | 15% | 10% |
| 1.20 | 40% | 27% | 20% | 13% |
| 1.25 | 50% | 33% | 25% | 17% |
| 1.28 | 56% | 37% | 28% | 19% |
| 1.30 | 60% | 40% | 30% | 20% |
| 1.35 | 70% | 47% | 35% | 23% |
| 1.40 | 80% | 53% | 40% | 27% |
| 1.45 | 90% | 60% | 45% | 30% |
| 1.50 | 100% | 67% | 50% | 33% |
| 1.55 | 110% | 73% | 55% | 37% |
MCA pricing snapshot by file quality
Factor rates aren't typically published broken out by tier — funders price file-by-file. This snapshot converts the market's typical factor-rate range (above) into APR by underwriting tier, using this page's own 9-month conversion math (effective APR assumes a debit every business day), so you can sanity-check an offer before you're in a live negotiation.
| File quality | Typical underwriting signals | Factor rate | Simple APR (9mo) | Effective APR |
|---|---|---|---|---|
| Clean file | Steady deposits, 6+ months operating, 500+ FICO, no stacking | 1.15 – 1.28 | ~20 – 37% | ~38 – 68% |
| Average file | Some deposit volatility, mid-500s FICO, no active stacking | 1.28 – 1.40 | ~37 – 53% | ~68 – 95% |
| Thin / higher-risk file | Recent NSFs, sub-500 FICO, or an existing MCA/RBF debit already on the account | 1.40 – 1.55 | ~53 – 73% | ~95 – 126% |
Illustrative, not a quote or guarantee — an actual offer depends on the funder's own file review. Above 1.55 factor is unusually expensive at any tier; see "when the math says walk away" below.
When the math says walk away
A factor rate isn't inherently a red flag — speed and a low eligibility floor have a real, legitimate cost. These are the specific conditions where an MCA/RBF advance stops being a speed trade-off and starts being the wrong tool:
- Already stacked. Adding a new advance on top of 2+ existing MCA/RBF debits is the pattern most funders themselves decline — the ones that don't price the stack punishingly. If daily/weekly debits from prior advances are already hitting the operating account, a new advance compounds cash-flow strain rather than solving it.
- Effective APR clears ~60-80% and the need isn't genuinely short-term. The worked examples above show fixed-daily effective APR running roughly 1.8× the simple-cost APR. At that level, the math only pencils for capital repaid in months, not a recurring or long-horizon need — a term loan or line of credit amortized over years is structurally cheaper for anything longer.
- Contract has Confession-of-Judgment language. Some MCA agreements let the funder enter judgment against the business without notice on a missed payment. Several states have moved to limit or restrict COJ clauses in recent years — this is a general legal-landscape note, not legal advice for your specific contract — and many funders have moved away from them as a result. A contract that still has one, without a clear explanation of when it triggers, is worth a second look (and a lawyer's read) before signing.
- The daily/weekly debit exceeds what average deposit consistency can absorb. A fixed debit sized against a good month, not an average month, turns a normal slow week into an NSF event. Compare the proposed debit against 3 months of actual bank statements, not the pitch.
None of this makes MCA/RBF the wrong product category — for a genuine short-term gap with a fast, known payoff date, it's often the fastest capital available. It's the combination of stacking, a long real-world payoff horizon, and debit sizing that doesn't match actual cash flow that turns a legitimate trade-off into a spiral. See why stacking MCAs destroys businesses for the stacking pattern in more depth.
Takeaways
- Factor rate × advance = total payback. Always run the APR conversion before signing.
- Simple-cost APR is the vendor-comparable number. Effective APR — roughly 1.8× simple with equal daily or weekly debits — is the apples-to-apples comparison to a term loan.
- Origination and ACH fees raise the true APR. Add them into cost of capital before comparing.
- Same factor on a shorter term is a much higher APR. Term length is the silent driver.
- If a term-loan APR is at least 15 points below the effective APR, refinancing usually pencils.
Frequently asked questions
What is a factor rate?
A factor rate is a multiplier on the funded amount that determines total repayment. A 1.28 factor rate on a $50,000 advance means total payback of $64,000 — regardless of how fast you pay it back. It's the standard pricing convention for merchant cash advances (MCAs), revenue-based financing (RBF), and some short-term working-capital products.
How do you convert factor rate to APR?
Use APR ≈ (factor − 1) × (12 ÷ term in months) × 100. A 1.28 factor over 9 months = 0.28 × (12 ÷ 9) ≈ 37% simple-cost APR. That formula treats the full advance as outstanding for the whole term. Because daily or weekly debits pay principal down as you go, the amortizing APR — the rate that makes the payments repay the advance — is roughly 1.8× that: about 68% for this example with a debit every business day.
Why is the effective APR roughly 1.8× the simple-cost APR?
Fixed daily or weekly debits pay down principal evenly across the term, so on average only about half of the advance is outstanding. The same dollar cost charged against a smaller average balance is a higher rate. Solving for the rate that makes the payments repay the advance (the internal rate of return) gives about 1.6× to 1.9× the simple-cost APR for factor rates of 1.15 to 1.55 and terms of 3 to 18 months — about 68% versus 37% for a $50,000 advance at 1.28 repaid over 9 months of business-day debits. If remittances are a percentage of sales, the rate depends on how fast sales actually repay the advance: faster repayment raises the APR and slower repayment lowers it.
Do origination fees change the APR?
Yes, materially. A 2.5% origination fee on a 9-month MCA at 1.28 factor adds ~3.3 points to the simple APR and ~7.4 points to the effective APR (about 68% to about 76% with business-day debits), because the fee also reduces the cash you receive. Most MCAs charge origination and/or ACH fees on top of the factor — always add them into your cost calculation, not the headline factor.
Does prepaying an MCA save money?
Usually not. Total payback is fixed at funding (advance × factor), so paying off early just front-loads the same cost. A small number of products offer 'early discount' tiers — read the agreement. The cleanest way to lower MCA cost is to refinance into a longer-term lower-APR product, not to prepay.
What's a typical factor rate range in 2026?
MCA factor rates in 2026 typically run 1.15 – 1.55. Clean files (steady deposits, 6+ months operating, 500+ FICO, no recent stacking) price toward the bottom; thinner files price toward the top. Above 1.55 is unusually expensive and worth pushing back on or shopping elsewhere.
What factor rate should I expect for my file quality? (pricing snapshot)
As of 2026-08-25, the market's ~1.15–1.55 factor-rate range breaks down roughly by file quality: clean files (steady deposits, 6+ months operating, 500+ FICO, no stacking) run 1.15–1.28, converting to a ~20–37% simple-cost APR (~38–68% effective on a 9-month term with business-day debits). Average files (some deposit volatility, mid-500s FICO) run 1.28–1.40, or ~37–53% simple (~68–95% effective). Thin/higher-risk files (recent NSFs, sub-500 FICO, or an existing MCA/RBF debit already on the account) run 1.40–1.55, or ~53–73% simple (~95–126% effective). This is illustrative — not a quote — funders don't typically publish rates broken out by tier, so this applies this page's own conversion math (above) to each tier's factor-rate bounds.
Why are factor rates even legal if they hide the APR?
MCAs are legally structured as the purchase of future receivables, not loans, so federal consumer-credit law (TILA / Regulation Z) doesn't require APR disclosure. Eleven states had a commercial financing disclosure law in effect as of October 10, 2026, but only CA (SB 1235) and NY (S5470B) require an APR on covered MCAs.
How accurate is the formula for revenue-share repayment?
The simple-cost formula assumes a fixed term. Revenue-share structures float — slow weeks extend the term, raising the effective APR; busy weeks shorten it. Use the funder's projected payback window for the calculation, and recompute against the actual payback period if revenue underperforms by 20%+ for a full quarter.
Should I refinance a high factor-rate MCA?
Often yes — if a term loan APR is at least 15 points below the MCA's effective amortizing APR AND the new monthly payment is below your current monthly debit, the refi pencils on both axes. Below that delta, the savings can get eaten by closing costs and the time it takes to qualify.
Are revenue-based financing and MCA the same thing?
Functionally similar, regulatorily distinct in some states. Both use factor-rate pricing and debit business deposits. RBF more commonly uses revenue-share holdbacks; MCAs more commonly use fixed daily debits. The APR conversion math is the same; with a revenue-share holdback the effective APR depends on how quickly sales repay the advance.
When should you walk away from an MCA offer?
Four conditions, individually or combined: (1) you already have 2+ existing MCA/RBF debits hitting the account — stacking is the pattern most funders themselves decline; (2) effective APR clears roughly 60-80% and the capital need isn't genuinely short-term (months, not a recurring need); (3) the contract has Confession-of-Judgment language without a clear explanation of when it triggers — several states have moved to limit or restrict COJ clauses in recent years (this is a general legal-landscape note, not legal advice for your specific contract) and many funders have moved away from them as a result; (4) the proposed daily/weekly debit is sized against a good month rather than the average of the last 3 months' actual deposits, which turns a normal slow week into an NSF event.
Is an MCA ever the right call despite the high effective APR?
Yes — for a genuine short-term gap with a fast, known payoff date, the speed and low eligibility floor are a real trade-off, not automatically a bad deal. The high effective APR only becomes the wrong call when it's paired with stacking, an actual payoff horizon longer than the projected term, or debit sizing that doesn't match real cash flow. Run the numbers above before signing either way.
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Published 2026-06-19 · Updated 2026-10-21 · https://clearvaluelending.com/answers/true-cost/factor-rate-to-apr