Factor Rate Definition | Business Lending Glossary
What is a factor rate in business financing? Clear explanation of how factor rates work, how to calculate total cost, and how to compare factor rates to APR.
Definition
A simple decimal multiplier used in merchant cash advances and some short-term financing to determine the total repayment amount.
Explanation
Unlike interest rates that accrue over time, a factor rate is applied once to the advance amount to calculate the total amount owed. The formula is straightforward: Total Repayment = Advance Amount × Factor Rate. Factor rates typically range from 1.1 to 1.5, meaning you repay 10% to 50% more than the amount advanced. The actual cost in annualized terms (APR) depends heavily on how quickly you repay — a 1.3 factor rate paid back in 4 months is far more expensive than the same factor rate paid back over 18 months.
Example
You receive a $75,000 merchant cash advance with a 1.38 factor rate. Your total repayment obligation is $75,000 × 1.38 = $103,500. The $28,500 difference is the cost of capital.
Why It Matters
Factor rates can obscure the true cost of financing because they are not directly comparable to APRs used in traditional loans. A 1.35 factor rate sounds modest but can represent 60–120% APR or more depending on repayment speed. Always calculate the total dollar cost and convert to an equivalent APR when comparing financing options.
Frequently asked questions
How do I convert a factor rate to an APR?
To calculate an approximate equivalent APR: (1) Determine the cost of capital (advance amount × factor rate − advance amount). (2) Divide the cost by the advance amount to get the percentage cost. (3) Divide by the estimated repayment period in years. For a $100,000 advance at 1.35 repaid over 9 months: cost = $35,000, 35% divided by 0.75 years = approximately 47% APR.
Can I negotiate a lower factor rate?
Factor rates are influenced by your business revenue, time in business, industry, existing debt positions, and the funder's risk appetite. Higher-revenue businesses with longer track records and fewer stacked positions typically qualify for lower factor rates. Shopping multiple funders through a platform like LendWorks Connect can help you find the most competitive rate.
