Factor Rate to APR
why a 1.4 factor is a 78% loan.
Merchant cash advance and factoring brokers quote "factor rates" instead of interest rates because the number looks smaller. A factor of 1.4 sounds like 40%. It isn't. Once you account for the term, the daily debits, and the lack of any benefit for paying early, the real APR is usually two to three times what the broker implied.
What a Factor Rate Actually Means
A factor rate is a simple multiplier. If you take $50,000 at a 1.4 factor, you owe $70,000 in total — period. There is no amortization, no interest accrual, no "remaining balance" in the way you'd see on a term loan. The full $20,000 of cost is baked in on day one.
That structure has two consequences:
- Paying early saves nothing. Whether you pay off in 6 months or 18 months, you owe $70,000.
- The shorter the term, the worse the APR. $20,000 of cost over 12 months is bad. Over 6 months, it's twice as bad annualized.
The Conversion Formula
To convert a factor rate to an approximate APR:
APR ≈ (Factor − 1) × (365 ÷ Days to Repay) × 100
This is a simplification — it ignores the fact that you're paying down principal over time, which actually makes the effective APR higher than this number, not lower. For a more precise APR, the daily debit schedule has to be amortized, which is what the invoice factoring calculator does.
Worked Example
$50,000 advance, 1.40 factor, 9-month estimated payback via daily ACH debits.
- Total repaid: $50,000 × 1.40 = $70,000
- Cost: $20,000
- Days to repay: ~270
- Simple APR: 0.40 × (365 ÷ 270) × 100 = 54%
- True effective APR (accounting for declining balance): roughly 78%
The 54% figure is what the simple formula gives you. The 78% is what a lender disclosing under TILA would have to print. That's why MCA providers fought disclosure rules for years — the gap between the two numbers is the entire sales pitch.
APR Equivalents at Common Terms
Approximate effective APRs for typical MCA / factoring quotes:
- 1.20 factor over 6 months → ~80% APR
- 1.25 factor over 9 months → ~58% APR
- 1.30 factor over 12 months → ~52% APR
- 1.40 factor over 9 months → ~78% APR
- 1.49 factor over 6 months → ~180% APR
For comparison, a "high-rate" SBA 7(a) loan in 2026 prices around 11–13% APR. An online term loan from a fintech runs 25–45% APR. MCAs almost always sit above that.
Why Daily Debits Make It Worse
Most MCAs debit your business bank account every weekday until the total is paid. That structure does three things to your effective rate:
- Front-loads the cost. You're paying down a fixed dollar obligation, but the principal you're using shrinks every day, so the rate on the money you actually have access to climbs as the term progresses.
- Compounds when you stack. Daily debits leave many businesses cash-short within weeks, so they take a second advance — paying the first one off with the second. Each stack adds another factor on top.
- Eliminates the "pay it off early" escape. Unlike a term loan, the obligation is locked. The only out is renegotiation or refinancing.
When MCAs Still Make Sense
An MCA is rarely cheap, but it's occasionally the right call:
- Bridge financing for a specific revenue event (a confirmed contract, a seasonal inventory buy with a known sell-through).
- Capital that genuinely cannot be obtained elsewhere — bank-declined, SBA-declined, no real estate to pledge.
- Short-term emergencies where the cost of the alternative (lost contract, missed payroll) exceeds the cost of the advance.
If none of those apply, an MCA is almost certainly the wrong product.
Sources
FTC Bureau of Consumer Protection guidance on small-business financing disclosures; California SB 1235 commercial financing disclosure rule; New York commercial finance disclosure law (NY Fin. Serv. §801–809).