If a funding offer quotes a number like 1.30 instead of a percentage, that's a factor rate. It's the most misunderstood number in small business funding — and once you can read it, you can compare offers in seconds and avoid expensive mistakes.
What is a factor rate, in plain English?
A factor rate is a simple decimal multiplier that tells you the total cost of an advance upfront. You multiply what you borrow by the factor rate and the answer is exactly what you'll repay — no math homework, no compounding surprises.
Factor rates almost always fall between 1.10 and 1.50. The number on the left of the decimal (the "1") represents your original loan amount. Everything past the decimal is the cost on top.
Example: Borrow $25,000 at a 1.30 factor rate. Total repayment = $25,000 × 1.30 = $32,500. The cost of capital is $7,500.
That's it. No interest accrues. No daily-balance calculation. Whether you pay it back in 4 months or 14, the total is locked from day one.
Where factor rates actually show up
You'll see factor rates on:
- Merchant cash advances (MCAs) — the most common product where factor rates apply
- Revenue-based financing — uses the same pricing convention
- Short-term unsecured advances from alternative funders
- Some equipment advances and working capital advances issued by fintech funders
You will not see factor rates on traditional bank loans, SBA loans, lines of credit, or term loans — those use APR.
Factor rate vs. APR — the comparison that confuses everyone
Here's the trap: a 1.30 factor rate sounds like 30% APR. It is not.
APR (annual percentage rate) is an annualized rate that accounts for repayment speed. If you repay a 1.30 factor rate advance in 6 months, the effective APR is roughly 50–60%. If you repay it in 12 months, the APR drops closer to 30–35%. The shorter the term, the higher the APR — even though the factor rate stays the same.
Side-by-side reference for a $25,000 advance at 1.30 factor rate:
- 4-month term → ~85–90% APR
- 6-month term → ~55–60% APR
- 8-month term → ~42–47% APR
- 12-month term → ~28–32% APR
The factor rate gives you the total cost. The APR gives you the cost-relative-to-time. Both matter, but for comparing offers against bank products, APR is the apples-to-apples figure.
How to calculate factor rate cost (with real examples)
The math has three steps:
Step 1 — Total payback: Amount × Factor Rate
Step 2 — Total cost of capital: Total Payback − Amount
Step 3 — Daily/weekly bite: Total Payback ÷ Number of payment days (or weeks)
Real example #1 — restaurant taking $30,000 at 1.25 for 6 months (130 business days):
- Total payback: $30,000 × 1.25 = $37,500
- Cost of capital: $7,500
- Daily payment: $37,500 ÷ 130 = $288/day
- Approximate APR: ~50%
Real example #2 — contractor taking $75,000 at 1.40 for 9 months (195 business days):
- Total payback: $75,000 × 1.40 = $105,000
- Cost of capital: $30,000
- Daily payment: $105,000 ÷ 195 = $538/day
- Approximate APR: ~62%
The daily payment is what actually matters to your cash flow. A 1.40 factor rate over 12 months can be easier to carry than a 1.25 factor rate over 4 months — even though the 1.40 number is "higher" on the surface.
Use our factor rate to APR calculator to convert any offer into an annualized cost you can compare against a loan.
See your real factor rate options
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See What I Qualify For →What determines your factor rate?
Funders price factor rates based on three things, in this order. For the full treatment — including what you can actually do to move the number — see what determines your factor rate, which is our main guide on that question.
1. Revenue strength and consistency
The single biggest factor. Strong, predictable monthly deposits ($30,000+/month) earn rates closer to 1.15–1.25. Weaker or seasonal revenue pushes rates to 1.35–1.49.
2. Time in business
6–12 months: expect 1.35–1.49. 1–2 years: 1.25–1.40. 2+ years with clean history: 1.15–1.30.
3. Personal credit + industry
FICO 650+ unlocks the lowest factor rates. 500–649 still gets approved but at higher rates. Certain industries (cannabis, adult, some construction) carry a "risk premium" of 0.05–0.10 on top.
Common factor rate mistakes (and how to avoid them)
Mistake #1: Comparing a factor rate to a bank APR. They are not the same number. Convert one to the other before deciding.
Mistake #2: Not asking the term. A 1.30 factor rate over 4 months is far more expensive (in APR terms) than 1.40 over 12 months.
Mistake #3: Focusing only on factor rate. Ask three things: total payback, term length, and daily/weekly payment. Those are the three numbers that matter.
Mistake #4: Assuming early payoff saves money. Most factor rate products charge a fixed total — paying early doesn't reduce what you owe unless your contract explicitly includes a prepayment discount.
Mistake #5: Stacking advances to "lower" the effective rate. Taking a second advance to pay off the first doesn't reduce cost — it usually multiplies it, since both funders are taking daily holdback.
Is a factor rate ever a good deal?
Honest answer: yes — in specific situations.
- When you need capital fast (24–72 hours), and the bank pipeline takes weeks you don't have
- When your credit isn't bankable (sub-650 FICO) and a factor-rate advance is your only realistic option
- When the use of funds generates ROI bigger than the cost — e.g., buying inventory at a 25% discount that funds a 40% margin sale
- When seasonality is on your side — the advance bridges a slow month before predictable revenue returns
It's the wrong product when you have time to wait for cheaper financing, when your business is losing money structurally, or when the use of funds doesn't generate ROI greater than the factor cost.
How to compare factor rate offers across funders
When you're shopping factor rate offers (and you should always shop multiple), build a quick three-column comparison:
- Total payback in dollars
- Term in months (or business days)
- Daily/weekly payment in dollars
The lowest factor rate isn't always the best offer. A 1.32 with a 9-month term often beats a 1.28 with a 4-month term once you map the cash flow impact.
This is also where a broker earns their seat at the table — submitting your file to the right funders and presenting only the offers that actually fit your cash flow.
The bottom line: A factor rate is a fixed multiplier. Total payback equals borrowed amount times the rate. Always pair it with the term length and daily payment to understand the real cost — and never assume it equals APR.
Are factor rates comparable across providers?
Not on their own. Two offers at the same factor rate can cost very different amounts, because the factor only sets total payback — it says nothing about fees deducted at funding, how fast you have to repay, or what happens if you pay off early. A 1.30 from one funder and a 1.30 from another are only equivalent if every one of those is also equal.
Three things break comparability in practice. Origination and administrative fees taken out at close mean you receive less than the advance amount while still repaying the full factored total, which raises the real cost without touching the headline number. Payoff speed matters because a factor rate is fixed in dollars: repaying a 1.30 in six months rather than twelve does not save you anything, but it doubles the daily drain on your account, so the same rate is a very different product at a different term. And prepayment treatment varies — some funders discount the remaining balance if you settle early and most do not, which is worth asking about in writing before you sign rather than after.
The comparison that actually works is net cash received against total dollars repaid, over a stated number of days. Reduce every offer to those three numbers and the ranking often changes. This is also where competition does the heavy lifting: with several offers on the table a funder has a reason to sharpen the number, and without them it does not.
How do you compare total payback on an MCA versus a loan?
Convert both to the same two figures: the total dollars you will repay, and the number of days you have to repay them. A loan quoted at an APR and an advance quoted at a factor rate cannot be compared directly, because one accrues interest on a declining balance and the other fixes the cost in dollars at signing.
Worked through: a $50,000 advance at a 1.35 factor rate means $67,500 repaid, so $17,500 is the cost, whether that takes eight months or fourteen. A $50,000 term loan at 18% APR over 24 months means a payment of about $2,496 and roughly $59,900 repaid in total, so about $9,900 in interest — and repaying that loan early genuinely reduces the interest, which is the structural difference between the two. The loan is cheaper in dollars here; the advance funds faster and has a much lower qualification bar. That is the actual trade, and it is only visible once both are in total-dollars form.
One caution that applies to every comparison of this kind: cost surprises are common enough to plan for. In the Federal Reserve Banks' 2025 Small Business Credit Survey, 60% of firms that borrowed from online lenders reported that their actual borrowing costs came in higher than expected, against 32% of large-bank borrowers. Getting total payback in writing before you sign is the single most effective defence against ending up in that 60%. Our MCA calculator will do the arithmetic if you would rather not.
Frequently asked questions
Related: What is a Merchant Cash Advance? · MCA Rates Explained · MCA vs Business Loan · Credit Score for MCA