Factor rate vs. APR: what a merchant cash advance really costs

The short answer

A factor rate is a multiplier. You repay the advance times the factor rate, no matter how quickly you repay it. A $50,000 advance at 1.35 means repaying $67,500, so the advance costs $17,500.

An APR is a yearly rate. It tells you what that $17,500 costs per year, given how long you actually hold the money. Because merchant cash advances are usually repaid within months, and repayment starts the day after funding, the APR is almost always several times the factor rate’s apparent “percentage”. At 1.35 over six months of daily payments, the estimated APR is about 131%, not 35%.

Why a factor rate isn’t an interest rate

With an ordinary loan, interest accrues on the balance you still owe. Pay it down faster and you pay less interest. A factor rate works differently in three ways:

1. The cost is fixed on day one. The $17,500 is owed whether you repay in four months or fourteen. Many contracts don’t discount early payoff at all.
2. Repayment starts immediately. Most advances collect a payment every business day from the day after funding. You never hold the full $50,000 for the whole term. On average you hold about half of it.
3. The term is short. Six to twelve months is common. A fixed cost spread over a short period is a high annual rate.

That’s why “1.35 = 35%” is misleading on two counts: it ignores the length of the term (35% over six months is roughly 70% a year even before anything else), and it ignores the fact that you’re paying it back as you go.

How the APR is calculated

The fair way to annualize the cost is the actuarial method, the one Regulation Z Appendix J prescribes for consumer credit. It asks one question: at what yearly rate do these payments exactly repay the money I received?

In practice:

• List every payment and the day it’s made (day 1, day 2, day 3, day 4, day 7 after a weekend, and so on).
• Find the daily rate i at which the present value of all the payments equals the money you received: Σ payment ÷ (1 + i)^day = money received.
• Multiply i by 365 to get the APR.

There’s no closed-form formula; it’s solved by trial and error, which is what our calculator does. The important detail is money received, not the advance amount. If fees are deducted before funding, you received less, and the APR rises.

The rule-of-thumb shortcut, and why it understates the cost

A common shortcut is: cost ÷ amount × (365 ÷ term in days). For the $50,000 advance repaid over 176 days:

$17,500 ÷ $50,000 × 365 ÷ 176 = 72.59%

That’s a little over half the actuarial APR of 131.49%. The shortcut assumes you hold the whole $50,000 for all 176 days, but you’re repaying about $536 every business day from the start. Your average balance is roughly half the advance, so the true rate is roughly double. Use the shortcut only as a floor: the real cost is always higher.

The term matters more than the factor rate

Holding the factor rate at 1.35 and changing only how long repayment takes:

The same $17,500 cost is a 66% APR over a year but a 264% APR over three months. Two offers with the same factor rate can differ enormously in real cost if their terms differ. Weekly payments come out slightly cheaper than daily ones over the same period, because you keep the money a few days longer on average.

And holding the term at 126 business-day payments while changing the factor rate:

For a wider grid, see the factor rate to APR table.

Fees: the hidden multiplier

Many advances deduct an origination or underwriting fee before funding. On the same $50,000 at 1.35 over 126 payments, a $1,500 fee means you receive $48,500 but repay $67,500. The cost rises to $19,000 and the APR from 131.49% to 145.73%.

A 3% fee added more than 14 points of APR because it’s paid on day one and the term is short. When comparing offers, always use the amount that actually lands in your account.

Holdbacks: when the term isn’t fixed

Some advances aren’t repaid in fixed daily amounts but as a percentage of card sales, the holdback. Then the term depends on how much you sell, and so does the APR. Counterintuitively, strong sales raise the APR: you repay the same fixed cost faster. We cover this in detail in how holdback percentages work.

Do funders have to disclose an APR?

It depends on the state. A merchant cash advance is structured as a purchase of future receivables rather than a loan, so federal Truth in Lending doesn’t apply. Several states have filled the gap with commercial financing disclosure laws:

• California and New York require providers to disclose an estimated APR on covered offers.
• Utah, Virginia, Florida, Georgia, Connecticut, Kansas, Missouri and Texas require cost disclosures (such as the finance charge and total repayment) without an APR.

The details differ, including which products and deal sizes are covered. See our state disclosure law summaries. Where no APR is disclosed, you can compute one yourself from the payback, the amount received and the payment schedule.

How to compare an advance with a loan

1. Get the amount you’ll receive after all upfront fees, the total payback, and the payment schedule (amount, frequency, number of payments) in writing.
2. Convert the advance to an APR using those figures.
3. Convert any loan offers the same way, including their fees. Our loan comparison calculator accepts a “total to repay” quote, so you can put an advance and a loan side by side.
4. Compare both the APR and the total dollar cost. A higher-APR option can still cost fewer dollars if it’s much shorter, but it will need bigger payments.

Common questions

Is a lower factor rate always better? Only on the same term. A 1.25 advance over four months can cost far more per year than a 1.35 advance over twelve.

Does paying early save money? Usually not, unless the contract offers an early-payoff discount. Ask before signing.

Is the APR the same as the “cost of capital”? For comparing financing options, yes, it’s the closest single number. But the dollar cost and the daily payment’s effect on cash flow matter just as much for a small business.