A factor rate looks like an interest rate wearing a small disguise: 1.25 sits next to 25% so naturally that most merchants read them as the same number. They are not, and the difference is where merchant cash advances make their money. A factor rate is a one-time multiplier on the original advance — payback = advance × factor — charged in full no matter how fast you repay, on money that fees may have already reduced before it reached you. This page works the math on one real-shaped deal, shows why three honest calculations give it three different “APRs,” and explains how to compare two factor quotes without the comparison being rigged. To run your own numbers, use the MCA calculator.
General information, not financial or legal advice. Figures below are one worked example computed three ways; your agreement’s figures are the ones that bind you.
It is not annual. Interest accrues over time; a factor is spent the moment you sign. A 1.25 factor remitted over twelve months and the same 1.25 remitted over four months carry identical payback — but the four-month version costs roughly three times as much per year. Any reading of a factor rate that ignores the calendar understates the cost.
It does not shrink as you pay. Loan interest is charged on the remaining balance, so every payment reduces the next month’s interest. A factor is charged on the original advance, in full, forever: halfway through remitting a $65,000 purchased amount you have paid half the money and none of the charge has been forgiven, because there is nothing to forgive — the $65,000 was fixed on day one.
It is quoted on money you may not have received. Origination and underwriting fees are typically deducted from funding. Payback is still calculated on the headline advance, so the charge falls on a smaller amount of actual cash — the gap the worked example prices next.
Take a $50,000 advance at a 1.30 factor rate, with $1,000 in fees deducted from funding, remitted as a 10% holdback on $60,000 of monthly receipts:
Now ask what “rate” that is. By the simple method most websites use — (factor − 1) × (12 ÷ months) — it is 33.2%. As an internal rate of return on the actual remittance schedule, the nominal figure is 61.20% and the effective annual rate is 81.64%. For this identical deal, a ranking competitor publishes an “effective APR” of 54.81%, and a daily-compounded calculation on weekday debits gives roughly 121%. Published “effective APRs” for near-identical deals range from about 33% to 121% depending on method — which is the whole lesson: for an MCA, APR is a method, not a fact. This site binds one method — the IRR on the projected remittance schedule, the approach California and New York disclosure law mandates — prints it as “estimated APR at the projected pace,” and shows the simple figure beside it so you can reconcile our number with any other site’s lower one.
With a loan, paying faster saves money. With a fixed purchased amount, paying faster saves nothing — the $65,000 is owed whether it leaves in six months or sixteen — so the faster you remit, the higher the effective cost per year climbs, and a slower sales period actually lowers it. This inversion is the single most counterintuitive fact in the product, and it is why strong sales right after funding make an MCA more expensive, not less. It is also why “we can have you paid off in four months” is a cost warning dressed as a feature.
Quoted factors most often run 1.1 to 1.5, with the position of your deal in that band driven by time in business, monthly receipts, industry and — above all — position. A second-position advance stacked behind an existing one typically prices at 1.35–1.49 (Outset Funding guidance, Oct 2026), and third positions higher still, because each later funder is repaid from receipts already spoken for; the arithmetic of stacking is in MCA stacking. Fees sit outside the factor entirely: two quotes at the same 1.30 can differ by thousands once deducted origination charges are counted, which is why every figure in the worked example is net of fees.
Three rules keep a comparison honest. Same advance: a lower factor on a smaller advance is not a cheaper deal. Same pace assumption: whoever assumes the faster remittance makes their effective cost look worse and their payoff look better; fix the receipts figure — your real one — for both. Net of fees: compare cost per $1,000 received, after deductions, not factor rates in the abstract. A quote that resists any of the three — payback stated without a factor, fees “confirmed at funding,” pace assumptions buried — is telling you how it wants to be misread. The mechanics of how the money actually leaves your account, including the reconciliation right that can correct debits sized on optimistic projections, are in how MCA payments work; the structures that usually beat both quotes are in merchant cash advance alternatives.
Is a 1.25 factor rate the same as 25% interest? No. The 0.25 in the factor is a one-time charge on the original advance, not an annual rate on a shrinking balance. Remitted over six months, a 1.25 factor costs roughly the same as a loan rate several times 25%; remitted over a year it still costs far more than 25% interest, because the charge never declines as you pay. The worked example above prices a 1.30 factor three ways — none of them is 30%.
How do you convert a factor rate to APR? There is no single conversion, because an MCA has no contractual APR — you must choose a method and a pace. The simple method, (factor − 1) × (365 ÷ days to repay), gives the lowest figure. Solving for the internal rate of return on the projected remittance schedule — the method California and New York require for disclosure — gives a materially higher one. This site’s MCA calculator shows both, labelled, for your own numbers.
What is a good factor rate for an MCA? The quoted band is roughly 1.1–1.5, and lower is better — but a factor rate alone cannot be “good,” because the same 1.20 costs twice as much per year remitted in five months as in ten, and fees deducted from funding raise the cost on cash actually received. Judge the whole deal: total payback, net funded amount, projected pace, and cost per $1,000 received.
Why is a merchant cash advance so expensive? Three compounding reasons: the charge is fixed on the original advance rather than shrinking with the balance; the remittance window is short, so a loan-sized charge is compressed into months; and fees deducted from funding mean you pay the factor on money you never held. Speed and light underwriting are real, and they are what the price buys.
General information, not financial or legal advice. Sources: LessOwe cluster 1.6 shared fact bank and #217 calculator specification (2026-10-23) — factor bands per NerdWallet and major explainers (Oct 2026); second-position range per Outset Funding (Oct 2026); competing published APR figure per TheModernWallet’s MCA calculator defaults (Oct 2026); disclosure method per California DFPI and NYDFS frameworks. Currency verified 2026-10-23.