Factor rate and APR are not interchangeable. A factor rate is a flat multiplier that determines the total amount you'll repay on a merchant cash advance. APR is an annualized percentage rate that expresses the cost of credit over a year. To compare an MCA to a bank loan honestly, you need to convert the factor rate to an APR-equivalent — a calculation most MCA funders won't volunteer.
This is how the conversion works, what the numbers actually look like, and when each metric is the right one to lean on.
Factor Rate, in One Line
A factor rate is a multiplier. Multiply it by the advance amount and you get total payback.
- $30,000 × 1.20 = $36,000 total — cost: $6,000
- $50,000 × 1.30 = $65,000 total — cost: $15,000
- $100,000 × 1.40 = $140,000 total — cost: $40,000
Factor rates typically range from 1.10 to 1.50. The factor itself doesn't depend on time — whether you pay back in 3 months or 12 months, the total stays the same. That's the structural difference from a loan.
APR, in One Line
APR (Annual Percentage Rate) is the cost of credit expressed as an annualized percentage of the principal. It includes interest plus any required fees, and it factors in time.
A $50,000 bank loan at 10% APR over 3 years costs roughly $7,900 in interest. A $50,000 bank loan at 10% APR over 12 months costs roughly $2,750 in interest. Same APR, different total dollars — because APR scales with time.
Why You Can't Compare Them Directly
A factor rate of 1.25 is not "25% APR." That's a common mistake.
If a $50,000 advance at 1.25 factor is repaid over 6 months, the APR-equivalent is roughly 60-70%. If the same factor rate is repaid over 12 months, the APR-equivalent drops to roughly 30-35%. The factor stays at 1.25 — but the time over which the cost is spread changes the annualized rate dramatically.
How to Convert Factor Rate to APR-Equivalent
A reasonable approximation:
APR ≈ ((Factor Rate − 1) × 365 ÷ Term in Days) × 2
The "× 2" accounts for the fact that you're repaying down the principal over time, so your average outstanding balance is roughly half the initial amount.
Worked examples
- $50,000 at 1.25 factor over 6 months (~180 days): ((1.25 − 1) × 365 ÷ 180) × 2 = ((0.25 × 365 ÷ 180) × 2 ≈ 101% APR
- $50,000 at 1.25 factor over 12 months (~365 days): ((0.25 × 365 ÷ 365) × 2 = 50% APR
- $30,000 at 1.20 factor over 9 months (~270 days): ((0.20 × 365 ÷ 270) × 2 ≈ 54% APR
- $100,000 at 1.40 factor over 12 months: ((0.40 × 365 ÷ 365) × 2 = 80% APR
Most MCA funders won't show you these numbers because they look high. Bank APRs of 8-12% look much smaller in print. The honest framing: an MCA is structurally more expensive than a bank loan — and faster, available to businesses banks decline, and underwritten on cash flow rather than credit. The cost reflects the speed and the access, not predatory pricing.
When to Use Which Metric
- Use factor rate when: you want to know exactly what you'll pay in total dollars, period. The factor is the cleanest number for budgeting the cost of capital.
- Use APR-equivalent when: you're comparing financing options across product types (MCA vs. bank loan vs. credit card vs. line of credit). APR normalizes the cost across different repayment structures so you can make a real comparison.
- Use cost-per-day when: you're evaluating whether the daily ACH fits inside your cash flow. Total cost matters less than whether the daily payment will choke operations.
The Real Question Behind the Math
If you can qualify for a bank loan or SBA loan, take it. The APR is materially lower, the math is in your favor.
But 82% of small business loan applications at large banks get denied (Federal Reserve Small Business Credit Survey data). For the businesses in that 82%, the comparison isn't MCA vs. bank loan. It's MCA vs. waiting 60 days, missing payroll, losing a contract, or watching a $200,000 revenue opportunity slip because they couldn't fund a $40,000 inventory order. In that frame, an 80% APR-equivalent on a 10-month MCA can be the highest-ROI capital decision a business makes that year. The cost is real. So is the alternative cost of doing nothing.
For the full breakdown of factor rate ranges and what drives them, see our guide to factor rates. For a side-by-side decision framework, see MCA vs. bank loan.
Sources & References
- Bank denial and small business credit access figures cited in this piece are derived from the Federal Reserve Small Business Credit Survey. Approval rates for small business credit applications at large banks have ranged from approximately 13%-31% across recent survey years, depending on bank category and reporting period.
- Small business finance landscape and lending program data: SBA Office of Advocacy.
- Merchant cash advance industry standards and disclosure practices: Small Business Finance Association (SBFA).
- Commercial financing disclosure regulations referenced (NY FAIR Act, CA SB 1235/666/362, VA, UT) are summarized from the published statutes; consult counsel for specific compliance application.