Factor rate
vs APR.

Walk into a bank and you'll be quoted a rate: 9.5% APR. Walk into an MCA office and you'll be quoted a factor: 1.35. Both numbers describe the cost of capital, but they're measured differently and they don't convert cleanly. The result is a market where two offers can be presented as obviously different — when in fact they cost almost the same — or as nearly identical, when in fact one costs twice as much as the other. Understanding the math is the only defense.

What a factor rate actually is

A factor rate is a multiplier on the advance amount that determines total payback. If you take a $50,000 advance at a 1.35 factor, your total payback is $50,000 × 1.35 = $67,500. That's the entire cost. There are no additional interest accruals, no late-payment compounding, no daily-rate calculations. The factor is the price, and the price is set on day one.

The factor rate exists because merchant cash advances are not legally loans — they are purchases of future receivables. Under that structure, the funder buys $67,500 of your future revenue for $50,000 today, and you remit the $67,500 over time through a daily holdback. There is no "interest" in the legal sense because there is no loan. The factor is the discount applied to the receivable purchase, expressed as a multiplier on the advance.

Typical factor rates in 2026 range from 1.18 to 1.55 depending on the business's strength and the term. The factor doesn't change with the term in a simple way — short terms tend to have lower factors and long terms have higher factors, but the relationship isn't proportional. A 6-month deal at 1.25 and a 12-month deal at 1.40 are very different products even though they look like they're priced similarly.

What APR actually is

APR — annual percentage rate — is a standardized measure of borrowing cost required for consumer loans by the Truth in Lending Act and adopted by most commercial lenders for term loans. It expresses the cost of credit as a yearly rate that accounts for interest, fees, and the time value of money. A 9.5% APR loan means that if you borrow $100,000 today and pay it back evenly over the loan term, your effective annualized cost is 9.5%.

APR's strength is comparability: you can compare a 9.5% APR loan against a 12% APR loan and the lower number is unambiguously cheaper, holding everything else equal. APR's weakness is that it requires a clearly defined loan structure to calculate — fixed principal, fixed interest rate, defined amortization schedule. Apply APR math to a non-loan instrument like an MCA and the math gets fuzzy fast.

Why the conversion is hard

Three structural differences make factor-to-APR conversion tricky. First, MCAs don't compound. A traditional loan accrues interest on the outstanding balance daily; an MCA's total payback is fixed at funding. The "interest" on an MCA is effectively pre-calculated, which means the relationship between the factor and the implied APR depends entirely on how fast you pay it back.

Second, MCAs amortize daily through the holdback mechanism. Each daily debit is part principal and part "cost" — but because there's no formal principal, you can't construct a normal amortization table. To calculate an effective APR you have to treat the daily debits as cash flows and run an IRR calculation, which gives you an answer but isn't equivalent to a loan APR in the strict regulatory sense.

Third, the actual term is variable. An MCA contract specifies a holdback percentage of daily deposits, not a fixed end date. If your deposits run faster than projected, the deal pays off early — and the effective APR rises because the same total payback got amortized over a shorter window. If deposits run slower, the term stretches and the effective APR drops. The factor stays constant; the APR moves with revenue.

Worked examples: $50,000 at 1.35

Let's work through real numbers. A $50,000 advance at a 1.35 factor means total payback of $67,500. The cost of the capital is $17,500 in absolute dollars, regardless of how long it takes to pay back. What changes with term is the effective annualized cost.

Over a 6-month term (roughly 130 weekday debits), the daily payment is approximately $519. Run the IRR on that cash flow series and the effective APR lands around 82%. That's expensive capital by any honest measure — but it's also fast, unsecured, and available to businesses that can't qualify elsewhere.

Over a 12-month term (roughly 260 weekday debits), the daily payment drops to approximately $260. Run the IRR on the same total payback over the longer window and the effective APR drops to roughly 47%. The total dollars paid are identical — $67,500 either way — but the annualized cost is nearly half because the same dollars are amortized over twice the time.

This is the math that confuses operators. A 1.35 factor isn't a fixed cost in APR terms. The same factor is a great deal at 12 months and a brutal deal at 6 months. The cost the operator actually feels is closer to the absolute dollars paid plus the daily debit's impact on cash flow — both of which depend on the term as much as on the factor.

How to think about cost honestly

The most useful framework we've found has three numbers. First, total payback in dollars — what you'll have written checks for by the time the deal is done. This is what your bottom line actually sees. Second, daily debit amount — what your cash flow has to absorb every business day. This is what your operations actually feel. Third, effective APR via IRR — what you'd compare against alternative offers. This is what an honest comparison shop requires.

The pitfall is anchoring on one number while ignoring the others. Operators who fixate on the factor rate alone often pick the shortest term they can carry, which minimizes the total dollar cost but maximizes the daily debit and maximizes the effective APR. Operators who fixate on the daily debit alone often take the longest term available, which feels comfortable day-to-day but maximizes the absolute dollars paid. Operators who fixate on APR alone sometimes choose a cheaper-APR product that doesn't actually fit their cash flow timing and run into trouble.

The right question is not "what's the lowest cost" — it's "what cost structure fits the use of funds and the cash flow that has to service it." A 6-month MCA at 1.30 is the right product for a 6-month inventory cycle in a seasonal business. A 24-month working capital loan at 28% APR is the right product for a 24-month buildout. Forcing the wrong product into the wrong timeline is more expensive than the highest factor rate on the right product.

The honest conclusion

Factor rate and APR are not enemies — they're two different ways of measuring the same underlying thing, calibrated for different products. The dishonest move is for any party — funder or broker — to quote a factor and obscure the implied APR, or quote an APR and obscure the daily debit reality. The honest approach, on both sides of the desk, is to present all three numbers at once and let the operator decide which trade-off fits.

Before you accept any capital offer, ask three questions: What are the total dollars I'll pay back? What's the daily or weekly debit my account will absorb? And what's the effective APR if I run the IRR on the payment schedule? Any reputable funder will give you all three numbers. A funder that won't is telling you something about how they think about the relationship — and the information you don't have is almost always the one that costs you the most.