Factor Rate vs APR: How to Convert

A factor rate tells you the total cost of a merchant cash advance; an APR tells you the cost per year. They are not interchangeable. A 1.35 factor rate on a $50,000 advance means you repay $67,500 no matter how long it takes, and if the merchant repays it in six months that works out to roughly a 139% APR. The shorter the repayment period, the higher the APR, which is why the same factor rate can be cheap money or ruinous money depending entirely on the term.

This article explains what a factor rate is, why it hides the annualized cost, how to convert one into an APR you can compare against a bank loan, and what the conversion still leaves out.

Last updated July 2026.

What is a factor rate?

A factor rate is a decimal multiplier that sets the total repayment on a merchant cash advance or short-term business advance. Multiply the advance by the factor rate and you have the full payback amount. Factor rates typically run between 1.1 and 1.5.

The arithmetic is deliberately simple. A $50,000 advance at a 1.35 factor rate means:

• Total payback: $50,000 x 1.35 = $67,500
• Cost of capital: $67,500 minus $50,000 = $17,500
• Cost as a share of the advance: 35%

That 35% is where the confusion starts. It looks like an interest rate and it is not one. It is the total cost, unannualized, and it does not change if the merchant repays in four months or fourteen. The factor rate is fixed at signing.

What is the difference between a factor rate and an APR?

An interest rate accrues over time, so paying a loan back faster costs less. A factor rate does not accrue, so paying an advance back faster costs exactly the same in dollars, and therefore much more per year. That inversion is the whole point of the comparison.

Because an advance has no fixed maturity, the repayment period is an estimate driven by the merchant's actual deposits and the holdback percentage. A strong sales month repays faster, which paradoxically makes the money more expensive on an annualized basis.

How do you convert a factor rate to an APR?

Start with the cost, then annualize it over the expected repayment period. The naive approach is to divide the cost by the advance and scale it up to a year, but that overstates how long the money was actually outstanding. The merchant is remitting every business day, so the balance amortizes toward zero from day one, and on average only about half the advance is outstanding across the term.

The standard approximate-APR formula accounts for that amortization:

APR ≈ (2 x n x c) / (P x (t + 1))

Where n is the number of payment periods in a year (252 for daily business-day remittance), c is the total cost in dollars, P is the advance amount, and t is the total number of payments over the term.

Work the $50,000 example at a 1.35 factor rate repaid over six months of daily remittance:

• Cost c = $17,500; advance P = $50,000
• Payments t = 6 months x 21 business days = 126; periods per year n = 252
• APR ≈ (2 x 252 x 17,500) / (50,000 x 127) = 8,820,000 / 6,350,000 = 139%

The same advance stretched over twelve months lands near 70%. Same factor rate, same dollars, half the annualized cost, because the money was outstanding twice as long.

Factor rate to APR conversion table

Estimated APR by factor rate and repayment term, assuming daily remittance on 21 business days a month and no additional fees. Read these as estimates, not quotes: an advance has no contractual maturity, so the real term depends on the merchant's deposits.

The pattern worth internalizing: at any factor rate, halving the term roughly doubles the APR.

Why does a shorter term make the APR higher?

Because the cost is fixed and the time is not. A merchant who repays $17,500 of cost over three months has paid for the use of the money for three months. A merchant who repays the identical $17,500 over twelve months has rented the same money four times longer for the same price. Annualizing divides the cost by the time, so the shorter the time, the larger the annual figure.

This produces the counterintuitive result that a merchant whose sales boom repays faster and, in APR terms, pays more. It also means a funder quoting a low factor rate with an aggressive holdback is not necessarily offering cheaper money. The holdback percentage, not the factor rate, controls how fast the advance repays and therefore what the APR turns out to be.

What is a good factor rate?

There is no universal answer, because a factor rate prices risk and speed rather than a credit score alone. Rates near the bottom of the range generally go to merchants with strong, consistent deposits, few or no NSF events, no existing advances and a longer operating history. Rates at the top go to merchants with thin balances, prior stacking or a declining revenue trend, and to second and third positions, which sit behind another funder in the daily deposit queue.

The more useful question for a business owner is not whether 1.35 is a good rate but whether the APR it implies beats the alternatives, and whether the daily holdback still leaves enough cash for payroll. A 1.35 factor repaid over twelve months at roughly 70% APR is expensive capital. The same factor rate repaid in three months at roughly 276% is a different product entirely.

Does the APR include fees?

The conversion above prices only the factor rate. Real advances frequently carry an origination or underwriting fee, an ACH or processing fee per remittance, and sometimes a broker commission built into the payback. These add to c in the formula and push the APR higher, occasionally by ten points or more.

To get a defensible number, add every dollar the merchant pays beyond the advance into the cost figure before annualizing. A $50,000 advance at 1.28 repaid over twelve months prices near 56% on the factor rate alone; add 2.5% in fees and it lands closer to 59%. Merchants reconciling those daily debits in their books, and the bookkeepers who have to get the statement activity into QuickBooks, are usually the first to notice the fees the term sheet did not annualize.

What this means for funders

Underwriters do not price the APR, they price the risk and set the holdback, but the two are linked. A holdback aggressive enough to repay in three months produces a triple-digit APR and a merchant under real cash pressure, which raises default risk on the very deal the holdback was meant to protect. Sizing the advance against verified numbers is what keeps the term realistic: true revenue net of transfers and financing proceeds, average daily balance, NSF and negative days, and the daily burden of any positions already stacked on the account.

LenderAnalyzer's merchant cash advance software computes those inputs from three to twelve months of statements, so the holdback is set against revenue the merchant actually earned rather than the deposit column. For the full credit-box walkthrough, see how merchant cash advance underwriting works end to end, and how funders detect stacking from bank statements before a second position turns a workable holdback into an unpayable one.