The 4-step process
Each step is concrete, sourced, and skim-readable. Plain English, no jargon.
- 1
Calculate the total finance cost
Multiply the advance amount by the factor rate, then subtract the advance amount. Example: $50,000 advance × 1.30 factor rate = $65,000 total payback. Finance cost = $65,000 - $50,000 = $15,000.
- 2
Determine the term length in days
MCA terms are typically 4-18 months. Convert to days: 9 months × 30 days = 270 days. Use actual term, not the contractual maximum, because some MCAs pay off faster if revenue is strong.
- 3
Apply the APR conversion formula
APR ≈ ((Factor Rate - 1) × 365) / Term in Days. Example: ((1.30 - 1) × 365) / 270 = (0.30 × 365) / 270 = 109.5 / 270 = ~40% APR-equivalent. Shorter terms produce dramatically higher APR-equivalent figures for the same factor rate.
- 4
Compare to amortizing loan options
If a term loan is available at meaningfully lower APR (say 12-18% for a quality SBA-tier borrower vs 40% MCA APR-equivalent), the term loan is usually the better economic choice. MCAs make sense when speed of funding (24-72 hours vs 45+ days for SBA) is essential.
Frequently asked questions
The most-asked follow-up questions — answered without the marketing spin.
Is factor rate the same as interest rate? +
No. Factor rate is a fixed multiplier — total payback is set at the time of funding regardless of how fast you repay. Interest rate (APR) is annualized — paying off early reduces total interest. The two measure different things; APR-equivalent conversion lets you compare.
Why is the APR-equivalent so much higher than the factor rate suggests? +
Because MCAs typically have short terms (6-18 months) while the factor rate looks like a tame number (e.g., 1.30 'only 30%'). Spreading the 30% finance cost over 9 months annualizes to ~40% APR. The shorter the MCA term, the higher the APR-equivalent.
More guides
https://clearvaluelending.com/guides/how-to-calculate-factor-rate-apr