What Is a Factor Rate? An Honest Explainer

Factor rate vs. interest rate — the key difference

An interest rate is time-based. You borrow $100, pay 10% interest per year, and after one year you owe $110. If you pay it back in six months, you owe ~$105.

A factor rate is NOT time-based. It is a simple multiplier applied once at the time the advance is issued. You receive $100 with a 1.30 factor rate. Your total repayment is fixed at $130 ($100 × 1.30). It doesn't matter if you pay it back in 30 days or 365 days — you always owe $130. The factor rate does not compound over time or accrue daily interest like a traditional loan.

How to calculate your total repayment

The formula is simple: Advance Amount × Factor Rate = Total Repayment.

Example: You receive a $50,000 advance with a 1.35 factor rate. Your total repayment is $50,000 × 1.35 = $67,500. You will repay $67,500 total, no matter how long it takes. If your funder takes 10% of daily revenue ($500/day on $5,000/day sales), you'll pay off the $67,500 in approximately 135 days (4.5 months). If your revenue spikes and you repay faster, you still owe exactly $67,500 — there's no prepayment penalty or discount for early repayment.

How to estimate APR from a factor rate

APR (Annual Percentage Rate) is calculated by converting the factor rate into an annualized percentage. The formula is: APR = (Factor Rate − 1) × (365 ÷ Repayment Days) × 100.

Example: $50,000 advance, 1.35 factor rate, expected 135-day repayment. Fee = $67,500 − $50,000 = $17,500. APR = ($17,500 ÷ $50,000) × (365 ÷ 135) × 100 = 0.35 × 2.70 × 100 = ~94.5% APR.

However, this APR is an ESTIMATE. The actual APR depends on how fast you actually repay. If your revenue drops and you take 200 days to repay, the effective APR falls to ~64%. If your revenue booms and you pay off in 60 days, the effective APR rises to ~213%. This is why MCA APRs vary widely — the stated APR assumes an average repayment term that may not match your business reality.

What a 'good' factor rate looks like

Industry-standard factor rates range from 1.15 to 1.50, depending on your credit profile and business strength.

For a business with 2+ years of history, 650+ credit score, and $50K+/month revenue: expect 1.15–1.25.

For a business with 1–2 years of history, 600–649 credit score, $20–50K/month revenue: expect 1.25–1.35.

For a newer business (6–12 months), 550–599 credit score, or $10–20K/month revenue: expect 1.35–1.50.

Rates above 1.50 are rare and usually indicate very high-risk applications or micro-advances. Rates below 1.15 are also rare — if a funder is offering 1.10 or lower, verify they're legitimate and understand their underwriting.

Questions to ask before signing

What is the exact factor rate? (Not a range — a specific number.) What is my total repayment amount in dollars? What will my daily or weekly payment be? How many days or months do you estimate I'll take to repay? Are there any additional fees beyond the factor rate (origination fee, origination, processing, prepayment penalties, ACH fees)? Can I prepay early without penalty? What happens if my revenue drops and I can't make my payment?

If a lender can't answer these questions clearly and in writing before you sign, do not proceed.