What Is a Factor Rate?
A factor rate is the multiplier that determines how much you repay on a merchant cash advance. Unlike an interest rate which accrues over time, a factor rate is applied once to the advance amount to calculate the total payback. If you receive a $100,000 advance with a factor rate of 1.35, you owe $135,000 total. That $35,000 premium does not change regardless of how quickly or slowly you repay.
Factor rates typically range from 1.1 to 1.5, with most falling between 1.2 and 1.4.
Factor Rate vs. Interest Rate
MCA companies use factor rates instead of interest rates for a reason. A factor rate of 1.3 sounds like 30 percent. But if you repay in six months, the annualized cost is roughly 60 percent. If you repay in four months, it is roughly 90 percent. A traditional business loan with 15 percent annual interest would cost $7,500 on $100,000 over six months. The MCA costs $30,000. Four times more.
How to Calculate the True Cost
Estimated APR = (Factor Rate – 1) / Repayment Term in Years
Example: 1.35 factor rate, 6-month term. (1.35 – 1) / 0.5 = 70 percent APR.
What Determines Your Factor Rate
- Monthly revenue. Higher and more consistent revenue means a lower factor rate.
- Time in business. Established businesses get better rates.
- Industry. Restaurants and retail are considered higher risk.
- Existing MCA debt. If you already have MCAs, the factor rate on additional advances increases substantially.
Negotiating Your Factor Rate
Factor rates are not set in stone. You can negotiate by getting quotes from multiple funders, demonstrating consistent revenue growth, and having an attorney review the terms. If you already have an aggressive factor rate, an attorney can often negotiate a restructured payoff that effectively reduces it.