Factor Rate vs APR: The One Calculation That Tells You If an Offer Is a Trap

TL;DR A factor rate hides the true cost of money. Convert it to APR before you sign. The shorter the term, the worse the real rate, and it is usually far higher than the factor makes it look.

When a funder quotes a factor rate instead of an interest rate, that is the first thing to pay attention to. A factor rate is a flat multiplier: borrow $50,000 at a 1.40 factor and you owe $70,000, period. It sounds simple, and that is exactly the problem.

Why a factor rate is so misleading

With a normal loan, paying it off early saves you interest. With a factor rate, you owe the full cost the moment you sign, no matter how fast you pay it back. So the same "1.40" costs wildly different true rates depending on the term:

• Pay $70,000 back over 18 months, and the APR is high.
• Pay that same $70,000 back over 6 months, and the APR is brutal, because you are paying the same fixed cost over a third of the time.

The factor rate never changes, but the true cost does. That is why funders quote it.

Convert your own offer

Enter the numbers from your offer and see the real APR, total payback, and what it costs you:

What the number means

If your offer comes back at an APR in the high double or triple digits, that is not unusual for merchant cash advances, and it is exactly why so many owners get stuck. A working capital loan or line of credit priced as a real APR is almost always cheaper, and you can often refinance out of a factor-rate product into one.

The honest rule of thumb

If someone quotes you a factor rate and will not show you the APR, that is your answer. A transparent option always shows the true cost. If you want a second set of eyes on an offer before you sign, that is exactly the kind of thing an independent advisor should do for free.