The short answer
A factor rate is a fixed multiplier, typically 1.1 to 1.5 per NerdWallet, applied to a merchant cash advance to set total repayment. A $40,000 advance at a 1.2 factor rate costs $48,000 no matter how fast you repay. Converted to APR, NerdWallet puts merchant cash advance costs at 40% to 350%.
How Factor Rate Math Works
A factor rate is a fixed decimal multiplier applied to a cash advance amount to determine the total dollar repayment, independent of time. Take $40,000 at a factor rate of 1.2: multiply the two and the payback is $48,000, meaning $8,000 in cost. At 1.35 the same advance costs $14,000. At 1.5 it costs $20,000.
The entire cost is fixed the moment you sign. There is no amortization, no principal and interest split, and no benefit to paying early unless the contract includes an explicit prepayment discount. Most do not, which means repaying in four months costs exactly what repaying in twelve would. Fees stack on top of the factor rate at many funders, so ask for the total payback figure, origination charges included, in a single written number.
Why a Factor Rate Is Not an Interest Rate
A 1.2 factor rate sounds like 20% interest. It is not, because interest rates are annualized and factor rates ignore time entirely. If that $8,000 cost on $40,000 is paid back over a full year, the effective APR lands near 35% to 40%. Paid back over six months, it roughly doubles. Paid back over four months of daily debits, the Estimated APR is above 100%, by our own calculation.
The shorter the term, the more violent the conversion. This is the core reason California and New York now require commercial financing providers, merchant cash advance funders included, to disclose an annualized rate: the factor rate systematically understates cost for exactly the short terms most advances carry.
How to Convert a Factor Rate to APR
A serviceable approximation: subtract 1 from the factor rate, multiply by 365, then divide by the number of days in the repayment term. A 1.3 factor over 180 days works out to roughly 0.3 x 365 / 180, or about a 61% simple annualized rate. True APR runs higher still, because the balance declines as daily payments are made while the fee does not.
Run that conversion on any offer before signing. An advance quoted at a friendly sounding 1.25 over 120 days carries a simple annualized cost near 76%, which is the honest number to weigh against a term loan or line of credit.
Comparing Offers Honestly
Never compare factor rates to interest rates directly, and never compare two factor rates without also comparing terms. A 1.2 over four months is materially more expensive per day than a 1.4 over eighteen months. The three numbers that matter are total dollar cost, daily payment, and effective APR, and any funder unwilling to state all three plainly is telling you something.
Brokers are commonly paid by the funder in points that are built into the rate, so ask any broker how they are compensated. Batch Capital, Batch Group's funding division, funds working capital advances with its own capital, including advances repaid through the card terminal, and places term loans, lines of credit and equipment financing with third-party funders, which set the terms on the files they fund and may pay Batch Capital. Ask us for the total payback, the daily payment, and the Estimated APR on any offer before signing.
Commonly Asked Questions
What is a typical factor rate on a merchant cash advance?
NerdWallet puts typical factor rates between 1.1 and 1.5. Stronger revenue, longer time in business, and cleaner bank statements pull the rate toward the low end of that range.
Does paying an MCA off early save money?
Usually not. The total repayment is fixed by the factor rate at signing, so early payoff saves nothing unless the contract includes a specific prepayment discount. Ask for one in writing before funding.
What APR does a 1.4 factor rate equal?
It depends entirely on the term. Repaid through daily debits over twelve months, a 1.4 factor works out to an Estimated APR near 71%; over six months, near 140%. The shorter the term, the higher the true annualized cost.
Sources
- NerdWallet: What Is a Factor Rate and How Do You Calculate It? (2026)
- NerdWallet: Merchant Cash Advance: What It Is and How It Works (2026)
- California Legislature: Financial Code Section 22802, Commercial Financing Disclosures (2024)
- deBanked: New York State Legislature Passes Law That Requires APR Disclosure On Small Business Finance Contracts (2020)
- deBanked: Year of the Broker Gives Way to Year of the Reduced Commission (2016)
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