The short answer: A factor rate is a multiplier on the amount you receive. A 1.35 factor on a $50,000 advance means you repay $67,500 — the advance times the factor. It is not “35% interest,” and the folk math that treats it that way understates the true cost by a wide margin. Translated honestly, a 1.35 factor over six months of daily payments is equivalent to about 125.85% APR.
The definition, with the math shown
Total payback = advance × factor rate.
| Advance | Factor | Total payback | Cost of capital |
|---|---|---|---|
| $50,000 | 1.20 | $60,000 | $10,000 |
| $50,000 | 1.35 | $67,500 | $17,500 |
| $50,000 | 1.40 | $70,000 | $20,000 |
| $100,000 | 1.35 | $135,000 | $35,000 |
That’s the entire formula. The factor tells you the gross payback and therefore the total cost. What it does not tell you — by design — is anything about the cost per year, which is the only number that lets you compare an advance against a loan.
Why “1.35 = 35% interest” is wrong
Interest is charged on the outstanding balance, which shrinks with every payment. A factor is charged on the full advance, up front, in full. Those are different prices.
Consider what the naive translations give for our $50,000 / 1.35 / ~6 months example:
- Folk formula: (factor − 1) × (12 ÷ months) = 0.35 × 2 = 70%. This is shown once, labeled as misleading. It assumes you hold the entire $50,000 for the full six months and repay it in one lump sum at the end. You don’t — payments start immediately, usually daily.
- Honest translation (TILA actuarial method): solve for the periodic rate that zeroes the present value of the actual projected payment schedule — 125.85% APR (nominal).
The folk formula understates the true cost nearly two-to-one here. The gap exists because daily payments mean your average outstanding balance is roughly half the advance, while the $17,500 price never shrinks. The folk formula prices a loan that doesn’t exist.
Why daily repayment makes it worse than it looks
Think of it this way: on day one you owe $67,500 and have received $50,000. Every business day, ~$519 leaves your account. By month three, you’ve repaid roughly half the balance — but the price of the money was fixed at $17,500 on day one. You are paying full price for money you only held briefly.
This is also why payment frequency matters. The same factor over the same estimated term costs slightly more with daily payments than with weekly payments (our analyzer prices the example at 125.85% daily vs. about 122% weekly — a small difference, not a decision driver, but proof that frequency is part of the price).
Nominal vs. effective: two honest numbers, one headline
Our Business Funding Cost Analyzer reports the MCA’s equivalent APR as a nominal rate (125.85%), with the effective (compounded) rate shown as a labeled supplement. The choice is deliberate:
- Every loan APR you’ve ever seen — mortgage, auto, term loan — is nominal. An 18% term loan’s effective yield is higher, but nobody quotes that.
- Headlining the MCA’s effective rate next to a loan’s nominal 18% would be a unit mismatch — technically “truer” and practically misleading.
Nominal lets you compare 125.85% against 21.17% on the same basis. That’s the comparison that matters.
What to do with a factor quote
- Compute the total payback (advance × factor). That’s your cost of capital.
- Convert to an equivalent APR using the projected payment schedule — or let the analyzer do it.
- Compare that number to loan APRs, not to the factor. A “low” 1.25 factor over 4 months can price higher than a “high” 1.40 factor over 12 months. The factor alone tells you nothing about cost per year.
- Check the term estimate. The funder’s estimated term is a guess about your revenue. Faster repayment = higher true APR. Ask what happens to the schedule if revenue dips — and read Merchant Cash Advance Renewals and Stacking before you assume the term.
What moves the equivalent APR: a sensitivity table
Same $50,000 advance, daily repayment, six-month estimated term — only the factor changes. Computed with the same actuarial method as the anchor example:
| Factor | Total payback | Cost of capital | Equivalent APR |
|---|---|---|---|
| 1.20 | $60,000 | $10,000 | 74.75% |
| 1.25 | $62,500 | $12,500 | 92.19% |
| 1.30 | $65,000 | $15,000 | 109.21% |
| 1.35 | $67,500 | $17,500 | 125.85% |
| 1.40 | $70,000 | $20,000 | 142.12% |
| 1.45 | $72,500 | $22,500 | 158.06% |
Every five points of factor adds roughly 16–17 percentage points of equivalent APR at this term. Now hold the factor at 1.35 and vary the estimated term:
| Estimated term | Equivalent APR |
|---|---|
| 3 months | 249.99% |
| 6 months | 125.85% |
| 9 months | 84.09% |
| 12 months | 63.14% |
The term dominates. A “low” 1.35 factor that repays in three months (249.99%) costs far more per year than a “high” 1.45 factor stretched over twelve (roughly 105% by the same scaling). This is why the funder’s estimated term deserves as much scrutiny as the factor: a fast-repaying business pays a much higher true rate than the same quote implies for a slow one.
Factor rate vs. interest rate, mechanically
| Interest rate (loan) | Factor rate (MCA) | |
|---|---|---|
| Charged on | Outstanding balance, which shrinks | Full advance, fixed at signing |
| Early repayment | Reduces total interest | Usually changes nothing — full payback still owed |
| Quoted as | APR (nominal, annual) | Multiplier (no time unit) |
| Comparable across offers | Yes, with fees included | Only after converting to equivalent APR |
The factor isn’t dishonest — it’s just incomplete. It answers “how many dollars?” and refuses to answer “per year?” You need both answers before you sign.
Related: the side-by-side worked comparison at Merchant Cash Advance vs. Term Loan, and the offer-comparison framework at How to Compare Business Loan Offers.
Paste any factor quote into the Business Funding Cost Analyzer and get its honest equivalent APR — plus a term loan priced the same way, for comparison.
Equivalent APRs are computed from the projected payment schedule (TILA actuarial method, nominal) — a translation for comparison, not a rate the funder quoted. MCAs are generally structured as purchases of future receivables, not loans, and are not subject to the same APR disclosure rules.