A factor rate is the price tag of a merchant cash advance. It's a single number — typically between 1.20 and 1.50 — that multiplies against your advance to give you the total amount you pay back. Below: the math, why MCA uses factor instead of interest, and how to read what a factor rate actually costs you.
The basic math
If your advance is $50,000 and the factor rate is 1.30:
- $50,000 × 1.30 = $65,000 total payback
- Cost of capital: $65,000 - $50,000 = $15,000
- That $15,000 is paid in equal daily ACH debits over the term (typically 6-7 months).
That's the whole formula. Multiply advance × factor = total payback. Subtract advance from that = cost. There's no compounding interest, no amortization curve, no balance accruing over time.
Why MCA uses factor instead of interest
An MCA isn't a loan — it's a purchase of future receivables. Loans use interest because they assume a fixed principal balance owed over time, with the interest as the cost of borrowing. Receivables purchases use factor because the structure is different: the funder buys a defined dollar amount of your future revenue at a discount today, and that defined dollar amount is what you owe back regardless of when it pays out.
Practically: a 1.30 factor over 7 months and a 1.30 factor over 12 months both equal $15K cost on a $50K advance. The factor doesn't compound. The cost is the cost.
Typical factor rate ranges by file quality
| File quality | Factor range | What it reflects |
|---|---|---|
| Tier 1 (best paper) | 1.18 – 1.28 | 2+ years in business, 700+ FICO, clean statements, no positions |
| Tier 2 (standard) | 1.28 – 1.38 | Most files. 1+ year TIB, 600+ FICO, healthy statements, 0-1 positions |
| Tier 3 (stretching) | 1.38 – 1.45 | Lower TIB or credit, multiple positions, statement red flags |
| Tier 4 (specialty) | 1.45 – 1.55 | Distressed files, restricted industries, sub-6mo TIB |
Factor rate vs APR — how to compare
The most common merchant question: "What's that as an APR?" Honest answer: factor rates don't convert cleanly to APR because the products work differently. But you can estimate the equivalent.
A 1.30 factor over 7 months on a $50K advance translates roughly to a 50-60% APR-equivalent. The math: total cost ($15K) over advance principal ($50K) over time (7 months) extrapolated to a year. The exact number depends on amortization assumptions.
Some states (CA, NY, VA, UT, CT) now require MCA funders to provide an APR-equivalent disclosure on commercial financing over certain thresholds. The disclosure is an "equivalent" rather than a literal APR because the product isn't a loan.
What moves your factor rate
Five inputs the funder uses to set your factor:
- Time in business. Each year of operation moves the factor down by roughly 0.02-0.05.
- Bank statement health. ADB above 10% of revenue, low NSFs, no negative days = better factor.
- Existing positions. 0 positions = best factor. Each additional position adds 0.05-0.10.
- Industry tier. Medical/manufacturing/professional services = lower factor. Restaurant/trucking/construction = higher.
- Credit score. Smaller mover than the above. Each 100-point FICO step ≈ 0.03-0.05 factor change.
Negotiating the factor
Factor rates are negotiable within a band of about 0.05 to 0.15 on most files. The lever: competing offers. A funder who knows you have other quotes will sometimes match or beat. Without competing offers, you're asking the funder to discount itself for no reason.
The honest cap: most files have a 0.05-0.15 negotiation band, not 0.20+. Trying to push a 1.40-priced file down to 1.25 just gets the file re-pulled and often killed.
What factor rate doesn't include
Some funders charge separate origination fees on top of the factor:
- Origination fees: typically 1-3% of the advance amount, sometimes deducted from the wire
- Wire/ACH fees: small ($25-$100 typically)
- Documentation/closing fees: vary by funder
Always ask: "Is the factor inclusive of all fees, or are there separate origination/closing fees?" The answer determines your real cash-in-hand.
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.