Factor Rate vs. APR — How to Compare MCA and Loan Offers

By Filip Kozina · Co-Founder, Commera Funding

Reviewed June 8, 2026 · 6 min read

The short answer

Factor rate and APR are two different ways of pricing the cost of capital, and they're not directly comparable. APR is time-based — it tells you the annualized cost of money over the term of a loan. Factor rate is a simple multiplier set at signing — it tells you the total dollar cost regardless of how fast you repay.

A 1.30 factor rate on a $50K advance means you pay $15K in cost, full stop. It doesn't matter if repayment takes 4 months or 12 months — the total is fixed.

A 10% APR on a $50K loan means the interest cost compounds with time. The same loan paid in 4 months costs roughly $1,700 in interest. Paid over 12 months it's about $5,000. Paid over 5 years it's about $13,800.

You can convert a factor rate to an estimated APR for comparison, but the APR you calculate is an estimate that depends on the repayment timeline. The same factor rate produces very different effective APRs depending on how fast your business actually pays it off.

What APR actually measures

APR (Annual Percentage Rate) is the annualized cost of a loan expressed as a percentage. For a standard term loan, it captures the interest rate plus most fees, expressed as what the loan would cost in a year.

APR is calculated assuming a specific repayment timeline (the loan term). A 5-year term loan at 10% APR amortizes the interest over 60 monthly payments. Each payment is partly interest, partly principal; the interest portion is higher in early months and lower as the principal pays down.

Key property: APR is time-based. The longer you carry the loan, the more interest you pay. Paying off a term loan early reduces total interest paid (subject to prepayment penalties, if any).

APR is the standard pricing metric for consumer loans (mortgages, auto loans, credit cards) and most commercial term loans. It's required disclosure under the federal Truth in Lending Act (TILA) for consumer credit — though TILA doesn't apply to most business financing.

What a factor rate actually measures

A factor rate is a simple multiplier applied to the advance amount, set once at signing. A $50K advance at a 1.30 factor rate means total repayment is $50K × 1.30 = $65K. The $15K difference is the cost of capital.

Key property: factor rates are NOT time-based. The total dollar cost is fixed at signing. Whether you repay the $65K in 4 months or 12 months, you owe $65K total. There's no compounding interest, no early-payoff discount (unless the funder offers one explicitly), no late-payment interest accrual.

Factor rates are the standard pricing metric for merchant cash advances. The structure is intentional: MCAs are legally structured as a purchase of future receivables, not a loan, so the cost isn't interest — it's the discount at which the funder buys the receivables. (This is also why MCAs aren't subject to most state usury caps, though that's changing in some jurisdictions.)

See our [factor rate explainer](/resources/what-is-a-factor-rate) for a deeper dive on the math and common factor rate ranges by credit profile.

Why they're not directly comparable

Comparing a 10% APR loan to a 1.30 factor rate MCA is like comparing 60 miles per hour to a 200-mile trip — they measure different things. APR measures rate; factor rate measures total dollar cost.

To compare them, you need a common dimension. The most common approach is to convert the factor rate to an estimated APR by including the repayment timeline. But this estimate depends on assumptions:

• How fast does the business actually repay the MCA? Factor rates are fixed cost; the effective APR depends entirely on speed of repayment. • Does the comparison include all fees on both sides? An APR-quoted loan with $5K of origination fees on top isn't really 10% APR — the real APR is higher. A factor-rate MCA with no additional fees may actually compare differently than the headline suggests. • What's the time value of money to the specific business? A faster-funded MCA may be worth a higher implied APR for a business that needs the cash now.

The estimated APR for an MCA is useful for ballpark comparison but is not a fixed property of the MCA the way an APR is a fixed property of a term loan.

The formula — converting factor rate to estimated APR

Standard formula: estimated APR = (Factor Rate − 1) × (365 ÷ Repayment Days) × 100

Walk through it: the (Factor Rate − 1) is the cost portion as a decimal of the advance (a 1.30 factor = 0.30, or 30% of the advance in cost). Multiplying by (365 ÷ Repayment Days) annualizes that cost over a year. Multiplying by 100 turns it into a percentage.

Example: $50K advance, 1.30 factor rate, expected 180-day repayment. Cost portion: 1.30 − 1 = 0.30 (30% of advance). 365 ÷ 180 = 2.028. Estimated APR: 0.30 × 2.028 × 100 = ~60.8%.

Same factor, faster repayment — $50K advance, 1.30 factor, 90-day repayment. 365 ÷ 90 = 4.056. Estimated APR: 0.30 × 4.056 × 100 = ~121.7%.

Same factor, slower repayment — $50K advance, 1.30 factor, 365-day repayment. 365 ÷ 365 = 1.0. Estimated APR: 0.30 × 1.0 × 100 = 30%.

Same factor rate, three very different effective APRs depending purely on how fast the business actually repays. This is why MCA-vs-loan APR comparisons are so often misleading — the MCA's effective APR isn't fixed.

Worked example — same $50K, factor 1.35, three repayment speeds

Scenario: $50K advance at a 1.35 factor rate. Total repayment $67,500. Cost portion $17,500.

**Fast repayment (60 days):** Business has a strong revenue month and pays off the full $67,500 in 60 days. Estimated APR: 0.35 × (365 ÷ 60) × 100 = ~213%. Looks brutal as an APR. But: total dollar cost was $17,500, on capital deployed for 60 days. That's the actual cost the business paid.

**Average repayment (180 days):** Business pays off the $67,500 over 6 months of normal operations. Estimated APR: 0.35 × (365 ÷ 180) × 100 = ~71%. Still high but more in line with typical MCA expectations.

**Slow repayment (365 days):** Business has revenue softness and the daily debit takes a full year to fully collect the $67,500. Estimated APR: 0.35 × (365 ÷ 365) × 100 = 35%. The effective APR is much lower, but the business carried debt for a full year with daily cash drag — a different kind of cost.

Notice what didn't change: the total dollar cost. $17,500, every time. The factor rate locks the total. Only the time-adjusted APR moves.

For comparison, a 5-year term loan at 35% APR (mathematically equivalent to the slow-repayment MCA above) would actually cost a borrower MORE in total dollars — because the 35% APR compounds for 5 years. Total interest on a $50K loan at 35% APR over 5 years: roughly $47K. The MCA at $17,500 total cost is materially cheaper in absolute dollars when the time-adjusted APRs look comparable.

This is the core insight: APR comparisons between MCA and term loans usually understate the MCA's relative cost in the short term and overstate it in the long term. Total dollar cost is often a better head-to-head metric.

When to use APR comparison and when to use total dollar cost

**Use APR comparison when:** you're comparing two products that both have time-based pricing — two term loans, two lines of credit, a credit card carried long-term vs a term loan. APR is the correct shared metric.

**Use total dollar cost when:** one product is time-based (APR loan) and the other is fixed-cost (factor-rate MCA). Total dollar cost over the realistic repayment timeline is more honest. Compare 'what do I pay in dollars from start to finish' on both options, then make the decision.

**Use both when:** you want to understand both the absolute cost (dollars) and the time-cost-of-capital (APR equivalent). A business with limited capital deployed for a short time tolerates higher implied APR than a business carrying long-term debt.

The best honest framing for any small business owner: 'What's the total dollar cost, and over what timeline, and can my business comfortably sustain the payment schedule?' That answers the real question better than any single rate metric.

What to ask any funder — MCA, term loan, or otherwise

**For an MCA:** What's the exact factor rate? Total dollar repayment? Daily or weekly debit in dollars? Estimated repayment timeline (and what assumption is that based on)? Any fees beyond the factor (origination, ACH, prepayment, default)? Is there a discount for early prepayment? See our [factor rate explainer](/resources/what-is-a-factor-rate) for a deeper walkthrough.

**For a term loan:** What's the APR (not just the interest rate — include all fees)? What's the term length? Monthly payment amount? Total interest paid over the full term? Origination, processing, or prepayment fees? Is the rate fixed or variable?

**For both:** Get the answers in writing, before signing. In California, New York, Florida, Georgia, Utah, Virginia, and several other states, this disclosure is required by law for non-bank commercial financing. Even where it's not required by law, any reputable funder should provide it without resistance.

If you've read this far, you understand factor rate vs APR better than most brokers. Use that knowledge: ask for total dollar cost on every offer, do the conversion math yourself, and don't let any salesperson tell you 'don't worry about the APR — just look at the payment.' The math matters.

Ready to see real MCA offers with full disclosures? Our [3-minute pre-qual](/apply) gives you matched offers from 3–5 funders in 2–4 business hours. Or see the [full small business financing landscape](/resources/types-of-small-business-financing) for the broader comparison across MCA, SBA, lines of credit, equipment financing, and more. Our [funding calculator](/resources/business-funding-calculator) also shows you an honest MCA cost estimate with factor rate and total dollar repayment before you talk to any funder.