Factor Rates vs APR: What an MCA Actually Costs
A factor rate is not an APR. Here is the worked math on what an advance actually costs, with a clear example.
If you are comparing a merchant cash advance to a loan, the single most important thing to understand is the price tag. They are quoted in different languages. A loan uses an APR. An advance uses a factor rate. Read one as if it were the other and you will misjudge the cost. This is general education, not financial, legal, or tax advice.
What a factor rate is
A factor rate is a single multiplier, usually somewhere around 1.1 to 1.5, that sets the total you pay back. You take the amount advanced and multiply it by the factor rate. That product is your full payback. There is no separate running interest calculation; the total is fixed when you accept.
The worked example
Say a business is advanced $50,000 at a factor rate of 1.25. The math is simple: 50,000 multiplied by 1.25 equals 62,500. So the business receives $50,000 and pays back $62,500 in total. The cost of the capital is the $12,500 difference. These figures are illustrative, not an offer.
Why this is not an APR
An APR expresses cost as an annualized percentage rate over time, and it assumes interest accrues across a term. A factor rate does neither. It is a flat multiplier with no time dimension built into the number itself. A factor rate is not an APR, and converting between them is not as simple as it looks, because the real annualized cost of an advance depends heavily on how fast it is repaid.
That last point matters. Because the dollar cost is fixed but the repayment speed can vary, the same factor rate can imply very different effective annualized costs. This is one reason an advance and a loan are genuinely hard to compare on a single number. The honest comparison lives in merchant cash advance vs business loan.
Early payoff usually does not save you
Here is the trap that surprises owners. With a typical interest-rate loan, paying early reduces the interest you owe. With most advances, the payback total is fixed when you sign. In the example above, that $62,500 is generally owed in full whether it takes you eight months or four to remit it. Paying faster frees up your cash flow sooner, but it does not normally reduce the total.
Some funders offer a prepayment discount, and some do not. Do not assume one exists. Ask, in writing, whether early payoff reduces the total before you accept. If it does, get the exact terms.
Two numbers to weigh, not one
The factor rate sets the total cost. The holdback, the share of deposits remitted toward the balance, sets the pace and therefore the size of each payment. A reasonable total cost with a payment your slow weeks cannot carry is still a problem. Weigh both against how your business actually gets paid. For how repayment behaves day to day, see the merchant cash advance explained.
Questions to ask before you sign
- What is the factor rate, and what is the total dollar payback in plain numbers?
- Is repayment a fixed daily or weekly ACH, or a true card-split?
- What is the holdback or daily/weekly payment amount?
- Does paying early reduce the total, and if so, exactly how much?
- Are there any fees on top of the factor rate?
Frequently asked
How do I calculate the cost of an MCA?
Multiply the amount advanced by the factor rate to get the total payback. For example, $50,000 at a 1.25 factor rate is $62,500 back, so the cost of the capital is the $12,500 difference. These figures are illustrative.
Is a factor rate the same as an APR?
No. A factor rate is a flat multiplier that sets a fixed total payback. An APR is an annualized percentage that assumes interest accrues over time. A factor rate is not an APR, and the two are not directly interchangeable.
If I pay off the advance early, do I pay less?
Usually not. With most advances the total payback is fixed when you sign, so early payoff frees your cash flow sooner but does not normally reduce the total. Ask the funder in writing whether a prepayment discount applies.
Why is the effective annualized cost hard to pin down?
Because the dollar cost is fixed while repayment speed can vary, the same factor rate can translate into very different annualized costs depending on how fast it is repaid. That is part of why advances and loans are hard to compare on one number.
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This article is general education, not financial, legal, or tax advice. Examples are illustrative and not offers. A factor rate is not an APR and the two are not interchangeable. FundVella is not a lender or bank; funding options, amounts, costs, and timing depend on underwriting and are not guaranteed.
Important disclosure
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