Factor Rate vs. APR: How to Compare the True Cost of Business Funding

Factor rate in one sentence

A factor rate is a fixed multiplier applied to the amount you receive to determine the total you repay. A $50,000 advance at a 1.25 factor rate costs $62,500 total, no matter how long you take to repay it. Factor rates are used by merchant cash advances and most revenue-based financing; APR is used by loans and lines of credit.

How to convert a factor rate to APR

The conversion depends entirely on the term, because APR is annualized and factor rate is not. The formula: APR ≈ ((factor rate − 1) ÷ term in days) × 365 × 2. The “× 2” is an approximation that accounts for declining balance — you do not owe the full amount for the full term.

• 1.15 over 12 months ≈ 30% APR.
• 1.20 over 6 months ≈ 80% APR.
• 1.25 over 4 months ≈ 150% APR.
• 1.35 over 9 months ≈ 93% APR.

Why APR can mislead on short-term funding

APR assumes you hold the money for a year. A 4-month advance at 150% APR costs $12,500 on $50,000 — the same dollars as a 12-month loan at about 44% APR. If the funding generates $30,000 in profit in those 4 months, the APR is irrelevant and the dollars matter. If it does not, no APR is low enough. Compare dollars and payment fit first, then APR as a sanity check.

The three numbers that actually matter

• Total payback: everything you will pay, including origination fees deducted from your deposit.
• Payment size and frequency: can your daily or weekly cash flow absorb it on your slowest week?
• Early payoff terms: fixed-cost products do not save interest when paid early unless the contract includes a prepayment discount. Always ask.

Fees that hide inside a “rate”

• Origination fee (1–5%) — deducted from your deposit, so you receive less than the stated amount.
• ACH or processing fee — small per-payment charges that add up on daily remittance.
• Underwriting or closing fee — usually flat, $250–$1,000.
• Wire fee — $25–$50 if you need a wire instead of ACH.
• Default fees or stacking penalties — read the contract.

Example: two offers, same dollars, different fit

Offer A: $75,000 at 1.18 factor, 6 months, daily payments of about $700. Total payback $88,500. Offer B: $75,000 term loan at 32% APR, 12 months, monthly payments of about $7,350. Total payback about $88,200. The dollars are nearly identical. The right choice depends on whether your cash flow prefers a small daily draft or a large monthly one — and whether you want to be done in 6 months or 12.