A factor rate isn't an interest rate — and the difference changes how you evaluate cost. Learn to convert any factor rate to an APR equivalent, understand what drives your rate, and decide whether an advance makes sense for your business.
Revenue-based financing (merchant cash advance) prices advances with a factor rate rather than an interest rate. A 1.30 factor means you repay $1.30 per dollar advanced — and the effective APR ranges from ~30% over 12 months to ~60% over 6 months for the same factor. Paying early doesn't reduce your factor cost unless your contract explicitly says so. The right question isn't 'is this rate cheap?' — it's 'does the funded ROI exceed the factor cost?'
Revenue-based financing — commonly called a merchant cash advance, or MCA — doesn’t carry an interest rate. That’s not a selling point; it’s a structural feature. Instead of interest, funders apply a factor rate: a decimal multiplier that determines the total amount you repay for every dollar advanced. Before signing any advance agreement, you need to understand what that number actually means in cost terms.
A factor rate is the ratio of your total repayment to the amount you receive. A factor of 1.30 means you repay $1.30 for every $1.00 advanced.
The calculation is straightforward:
Total repayment = advance amount × factor rate
Example: A $50,000 advance at a 1.30 factor rate results in a $65,000 total repayment — $50,000 in principal plus $15,000 in fees.
The critical difference from interest: the factor cost is fixed the moment you sign. It doesn’t accrue over time. It doesn’t compound. The $15,000 in the example is owed whether you repay in 3 months or 12.
The Federal Reserve’s 2024 Small Business Credit Survey found that 43% of employer firms that applied for credit used an online lender or fintech — many of which price working-capital products using factor rates rather than annualized interest rates. That’s a large pool of business owners making cost decisions without a common unit of comparison.
Factor rates aren’t inherently more expensive than term loans — but you can’t compare them without converting to an annualized basis. The formula:
APR equivalent = (factor rate − 1) × (365 ÷ repayment term in days)
The repayment term is the key variable. The same factor rate produces a meaningfully different effective APR depending on whether you’re repaying over 6 months or 12:
| Factor Rate | 6 months (180 days) | 9 months (270 days) | 12 months (360 days) | |-------------|---------------------|---------------------|----------------------| | 1.10 | ~20% APR | ~14% APR | ~10% APR | | 1.20 | ~41% APR | ~27% APR | ~20% APR | | 1.30 | ~61% APR | ~41% APR | ~30% APR | | 1.40 | ~81% APR | ~54% APR | ~41% APR | | 1.50 | ~101% APR | ~68% APR | ~51% APR |
A 1.30 factor over 12 months (~30% APR) is in the same range as a non-bank line of credit for a mid-tier file. The same factor over a 6-month term (~61% APR) is substantially more expensive. Shorter repayment terms push the effective APR higher for any given factor.
Use the calculator below to run the math on your specific advance offer.
Revenue-based funders price each advance individually. The Federal Reserve’s Small Business Credit Survey identifies revenue volume, time in business, and bank statement quality as the dominant underwriting signals for working-capital products outside the traditional bank channel. Those translate to the following factor rate drivers:
Time in business. Businesses with 18+ months of operating history in a consistent-revenue industry typically qualify for factors in the 1.10–1.28 range. Newer businesses (6–12 months) generally start at 1.30–1.45.
Monthly deposit volume and consistency. Strong, consistent deposits ($30,000+/month with low variance month-to-month) signal a reliable repayment source. High volatility or sharp revenue drops raise the perceived risk and the factor.
Bank statement quality. NSFs (non-sufficient funds), recurring overdrafts, and large unexplained withdrawals are underwriting negatives. Funders read bank statements as a proxy for how well you manage cash flow — which is directly predictive of whether you’ll make daily repayments without issue.
Industry risk profile. Sectors with inherently variable revenue — restaurants, retail, seasonal contractors — face structurally higher factors. Medical practices, professional services firms, and businesses with predictable recurring billing typically qualify for better rates.
Existing debt and stacking. Taking a second advance while an existing one is outstanding is called stacking. The FTC’s guidance on business credit and financing flags stacking as a pattern that compounds repayment risk and typically results in higher factor rates or outright declines on a second advance.
If you’re hoping to pay off your advance early to reduce cost, read your contract before counting on it. Most standard advance agreements do not include a prepayment discount — the factor is fixed at signing, and the full repayment amount is owed regardless of how quickly you repay.
A minority of contracts include explicit “early payoff” or “prepayment savings” provisions. If your funder offers one, get it in writing and calculate the actual savings before treating it as a significant factor in your decision.
This is the structural difference from a term loan or line of credit. On a term product, interest accrues daily — paying off early stops the accrual and directly reduces what you owe. The CFPB’s small business lending research notes that this structural distinction makes cost comparisons between advance products and term products non-intuitive without the APR conversion.
Several states now require commercial financing providers to disclose the equivalent APR and total repayment amount at the point of offer, before you sign. See State Commercial Financing Disclosure Laws: Where the Map Stands in 2026 for which states apply and what you should receive.
Factor rates look high compared to bank rates. Whether an advance makes sense depends entirely on the ROI of what you’re funding — not on the rate comparison in isolation.
The productive-debt framework: if the advance funds something that returns more than its total cost, the net economic outcome is positive. A restaurant taking a $30,000 advance at 1.30 factor (total payback: $39,000) to purchase seasonal inventory that generates $70,000 in revenue nets $31,000 after the advance cost. The $9,000 factor is the price of the capital that unlocked the margin.
Situations where the math typically works: - Funding a specific inventory purchase or equipment acquisition tied to an identified revenue opportunity - Bridging a seasonal cash-flow gap when the incoming revenue is visible (a large contract payment, season-end receivables) - Moving faster than a traditional loan process allows on a time-sensitive opportunity
Situations to evaluate alternatives first: - Funding ongoing operating expenses with no discrete revenue-generating event (the advance rolls, and effective cost compounds with each renewal) - When your FICO, time in business, and monthly revenue qualify you for a line of credit — revolving access at 18–35% effective APR almost always beats a factor advance on cost and flexibility - When daily ACH repayment would exceed 10–15% of your average daily deposits, creating a cash-flow squeeze
For a full side-by-side analysis, see Line of Credit vs. MCA: When to Choose Each in 2026. If you’re currently in a high-cost advance and want to evaluate exiting, Refinancing a High-Cost Advance into a Term Loan covers the conditions that make a refinance work and what the math looks like.
The apply step: ClearValue Lending routes your file against working-capital partners and returns the actual offer — with the factor rate, repayment term, and daily payment amount shown before you commit. Start an application to see what your business profile qualifies for.
A factor rate is a multiplier that determines your total repayment amount. A factor of 1.30 on a $50,000 advance means you repay $65,000 in total — the $15,000 difference is the funder’s fee. Unlike an interest rate, the factor is fixed at signing and doesn’t change based on how fast you repay.
Multiply (factor rate − 1) by (365 divided by your repayment term in days). A 1.30 factor repaid over 180 days: (0.30 × 365 ÷ 180) = approximately 60.8% APR. The same factor over 360 days ≈ 30.4% APR. Shorter repayment periods always produce higher effective APRs for the same factor.
Usually not. Most standard advance agreements require the full factor payback regardless of repayment speed — paying in 3 months instead of 6 costs the same in total dollars but a higher effective APR. Some contracts include explicit prepayment discounts; verify this in writing before assuming early payoff reduces your cost.
Strong files (650+ FICO, 18+ months in business, $30,000+/month in consistent deposits) typically see 1.10–1.28. Mid-tier files (580–650 FICO, 12+ months) see 1.28–1.40. Higher-risk files see 1.40–1.55. These are network-level ranges — your actual rate depends on your specific file and the funder’s current pricing.
Revenue-based financing (MCA) is the better fit when you need capital in 24–72 hours, when your credit or time-in-business doesn’t qualify for a line, or when you’re funding a specific high-ROI opportunity. A line of credit wins on cost and flexibility when you qualify (typically 600+ FICO, 12+ months in business) — revolving access at 18–35% APR beats most factor rates.