Factor rate vs. APR: how to compare the real cost of funding

A factor rate is a decimal multiple applied to a funded amount to determine the total amount owed. A 1.30 factor rate on $50,000 means $65,000 is repaid in total, regardless of how long repayment takes. Factor rates are used for merchant cash advances and other receivables purchases, where there is no interest accrual and no fixed maturity date.

The key property is that the number is fixed at origination. Nothing about the passage of time changes it.

APR expresses the cost of borrowing as an annualized percentage that includes interest and most fees. Because it is time-based, the same dollar cost produces a different APR depending on how long the money is outstanding. A $15,000 cost over three months is a far higher APR than the same $15,000 cost over eighteen months.

Use the total cost, the funded amount, and the estimated repayment period. The rough conversion is: (total cost ÷ funded amount) ÷ (repayment months ÷ 12) × 100, then adjust upward because the balance amortizes rather than staying outstanding for the whole term.

A $50,000 advance at a 1.30 factor rate delivered over nine months carries $15,000 of cost, which is roughly a 40% simple annualized rate before amortization adjustment, and materially higher once amortization is accounted for. The same advance delivered over eighteen months is roughly half that.

Because the obligation is a fixed amount, not accruing interest. Delivering it in four months instead of nine does not shrink the total; it raises the effective annualized cost. On a simple-interest loan, the opposite holds: interest stops accruing on the balance you repay, so early payoff genuinely saves money.

This single distinction is the most common source of mispricing in small business funding decisions.

If your revenue is stable and you qualify for fixed-payment credit, simple interest is generally the lower total cost. If revenue is volatile or seasonal, the revenue-linked structure of an advance transfers timing risk away from you, and that protection has a price.