A factor rate is a fixed cost multiplier — typically 1.10 to 1.50 — applied to merchant cash advances (MCAs) and revenue-based financing: multiply the advance amount by the factor rate to get total payback (a $50,000 advance at 1.30 = $65,000 owed, $15,000 in financing cost). Unlike interest rates, factor rates don't compound and the total payback is locked at funding — paying early does not reduce what you owe.
A factor rate is the pricing convention used for merchant cash advances (MCAs) and most revenue-based financing products. You multiply the amount advanced by the factor rate to get the total amount you'll pay back. A $50,000 advance at a 1.30 factor rate means you'll pay back $65,000 total — $15,000 in financing cost. Factor rates are fundamentally different from APRs. APR is annualized and reflects the time value of money — paying off early reduces total interest. With a factor rate, the total payback is fixed at the time of funding regardless of how fast you repay (unless the product has an explicit prepayment discount in the contract). For comparison shopping, convert factor rate to APR-equivalent: APR ≈ ((factor rate - 1) × 365) / (term in days). A 1.30 factor over 9 months (~270 days) is roughly 40% APR-equivalent. This is why factor-rate financing is typically more expensive than amortizing term loans for the same credit risk. The CFPB's explainer on understanding loan costs (https://www.consumerfinance.gov/consumer-tools/educator-tools/youth-financial-education/teach/activities/understanding-loan-costs/) provides context for comparing financing options. Several states now require APR-equivalent disclosure for MCA products — see the FTC's small business resources (https://www.ftc.gov/business-guidance/small-businesses) for commercial financing transparency guidance. According to the Federal Reserve's 2024 Small Business Credit Survey (https://www.fedsmallbusiness.org/survey/2024/report-on-employer-firms), 15% of small employer firms that applied for financing received a merchant cash advance or similar cash-flow advance product — making factor-rate pricing one of the most common cost structures SMB owners encounter outside of traditional bank loans. California (SB 1235, effective 2022) and New York (Commercial Financing Disclosure Law, effective 2023) now require lenders to disclose an APR-equivalent on factor-rate products; additional states including Utah and Virginia have enacted similar laws.
A factor rate is the cost multiplier used to price merchant cash advances (MCAs) and revenue-based financing. You multiply the advance amount by the factor rate to get the total repayment. A $50,000 advance at a 1.30 factor rate = $65,000 total repayment — $15,000 in financing cost. Factor rates typically range from 1.10 to 1.50. Unlike interest rates, factor rates don't compound and the total payback is locked at funding — paying early does not reduce what you owe unless the contract includes an explicit prepayment discount. Source: Federal Reserve Small Business Credit Survey 2024 (fedsmallbusiness.org); FTC small business financing guidance (ftc.gov).
Approximate formula: APR ≈ ((factor rate - 1) × 365) / (term in days). For a 1.30 factor over 270 days (9 months): ((1.30 - 1) × 365) / 270 = ~40% APR-equivalent. Online MCA calculators automate this. The shorter the term, the higher the APR-equivalent for any given factor rate.
Usually no, unless the contract has an explicit prepayment discount. The total payback is locked at funding. Some lenders offer 'early payoff discounts' that reduce the total if you pay within a window, but this must be in writing in your funding agreement. Confirm prepayment terms before signing.