To convert a factor rate to APR: subtract 1 from the factor rate to get the total fee rate, divide by the repayment term in years, then multiply by roughly 1.8–2 to account for the declining balance. A 1.30 factor rate repaid over 9 months is approximately 73% effective APR — not the 40% the simplified formula suggests. Use the calculator below to get an exact number for your deal.
A 1.30 factor rate sounds like 30% interest. It isn’t.
Depending on how fast you repay, that same 1.30 factor rate translates to roughly 37% APR over 18 months — or 217% APR over 3 months. The factor rate never changes; the repayment term is doing almost all of the work. This is not a coincidence: factor rates are designed to obscure the annualized cost of capital. Here’s the exact math to see through them.
What a Factor Rate Actually Tells You
A factor rate is a multiplier. A 1.35 factor on a $100,000 advance means:
- Total repayment: $100,000 × 1.35 = $135,000
- Total fee (your cost): $135,000 − $100,000 = $35,000
That $35,000 is fixed. It doesn’t matter whether you repay in 6 months or 18 months — you still owe $35,000 in fees. This is what makes factor rates fundamentally different from interest rates, where paying off early saves you money.
The Two-Step Formula
There are two levels of precision for converting a factor rate to APR.
Step 1 — The Quick Flat-Rate APR
This is the simplified method and the easiest to calculate in your head:
Flat-rate APR = (Factor Rate − 1) ÷ Term in Years
Example: 1.35 factor, 9-month term (0.75 years)
0.35 ÷ 0.75 = 46.7% flat-rate APR
This is useful as a quick filter. It also understates your real cost by roughly half.
Step 2 — The Effective APR (The Real Number)
An MCA is repaid in small equal payments every business day. That means your outstanding balance declines throughout the term — but the full fee was fixed at the start based on the original advance. On a declining-balance basis, the effective cost is roughly 1.8–2× the flat-rate APR.
Effective APR ≈ Flat-rate APR × 1.8
Using the same example: 46.7% × 1.8 = ~84% effective APR
For an exact number, use an IRR (internal rate of return) calculation — which is what the MCA Cost Calculator on this site does. The shortcut gets you within 10–15 percentage points; the calculator gets you to one decimal place.
Three Worked Examples
Example 1: $50,000 Advance, 1.20 Factor, 6-Month Term
| Advance amount | $50,000 |
| Factor rate | 1.20 |
| Total repayment | $60,000 |
| Total fee | $10,000 |
| Repayment term | 6 months (≈ 126 business days) |
| Daily payment | ~$476/day |
| Flat-rate APR | 40% |
| Effective APR (IRR) | ~75% |
A term loan for $50,000 at 24% APR over 6 months would cost approximately $3,600 in interest. The MCA costs $10,000 — about 2.8× more. The justification for that premium: qualification takes minutes, funding happens the same day, and no collateral is required.
Example 2: $100,000 Advance, 1.35 Factor, 9-Month Term
| Advance amount | $100,000 |
| Factor rate | 1.35 |
| Total repayment | $135,000 |
| Total fee | $35,000 |
| Repayment term | 9 months (≈ 189 business days) |
| Daily payment | ~$714/day |
| Flat-rate APR | 46.7% |
| Effective APR (IRR) | ~84% |
This is a common MCA profile. At ~84% APR, the cost is significant — but businesses with $500K+ in annual card revenue for whom $714/day is a predictable line item may absorb it comfortably to fund an expansion or cover a one-time gap.
Example 3: $75,000 Advance, 1.50 Factor, 12-Month Term
| Advance amount | $75,000 |
| Factor rate | 1.50 |
| Total repayment | $112,500 |
| Total fee | $37,500 |
| Repayment term | 12 months (≈ 252 business days) |
| Daily payment | ~$446/day |
| Flat-rate APR | 50% |
| Effective APR (IRR) | ~87% |
A 1.50 factor rate over 12 months is near the upper limit of what reputable MCA lenders offer — and $37,500 in fees on $75,000 borrowed is a very high cost of capital. If you’re being quoted a 1.50 factor for a 12-month term, it’s worth exhausting alternative options (lines of credit, invoice factoring) before signing.
Quick Reference: Factor Rate × Term → Effective APR
The table below shows estimated effective APRs using the IRR method with daily business-day payments (252 business days/year), consistent with the calculator on this site. All figures assume a $100,000 advance for illustration; the APR is the same regardless of advance size.
| Factor Rate | 3-Month Term | 6-Month Term | 9-Month Term | 12-Month Term |
|---|---|---|---|---|
| 1.10 | ~76% | ~38% | ~26% | ~19% |
| 1.20 | ~149% | ~75% | ~50% | ~38% |
| 1.30 | ~217% | ~109% | ~73% | ~55% |
| 1.40 | ~283% | ~142% | ~95% | ~71% |
| 1.50 | ~346% | ~174% | ~116% | ~87% |
Key takeaways from this table:
- The repayment term matters more than the factor rate. A 1.40 factor over 12 months (~71% APR) is cheaper than a 1.20 factor over 3 months (~149% APR).
- Short terms are brutal. A 1.30 factor over 3 months is ~217% APR — nearly four times what the same factor rate costs over 12 months (~55%).
- “Low” factor rates aren’t necessarily cheap. Even a 1.10 factor over 3 months is ~76% APR.
How MCA Stacks Up Against Alternatives
Before signing an MCA, run this comparison. Using a 12-month $100,000 need as a baseline:
| Product | Typical APR | Total Interest / Fees | Speed |
|---|---|---|---|
| SBA 7(a) loan | 9.75–12.75% | ~$5,100–$6,700 | 30–90 days |
| Bank term loan | 7–15% | ~$3,800–$8,500 | 2–6 weeks |
| Online term loan | 20–40% | ~$11,000–$23,000 | 1–5 days |
| Business line of credit | 25–60% | ~$14,000–$36,000 | 1–3 days |
| Merchant cash advance (1.35, 9 mo.) | ~84% | $35,000 | Same day |
| Merchant cash advance (1.50, 12 mo.) | ~87% | $50,000 | Same day |
The gap between an MCA and an online term loan is often $12,000–$25,000 per $100,000 borrowed. That premium buys speed and loose qualification requirements. Whether it’s worth it depends entirely on your specific situation.
How to Use the Calculator
The Business Loan & MCA Calculator on this site handles the IRR calculation automatically:
- Click “Merchant Cash Advance” tab
- Enter your advance amount
- Enter the factor rate (e.g., 1.35)
- Slide the repayment term
- Toggle between daily and weekly payments
The calculator displays your effective APR alongside a color-coded indicator and a direct comparison-ready number. If the APR shows red (≥ 60%), it’s worth calling at least one alternative lender before signing.
One warning: Some MCA contracts quote factor rates after deducting origination fees from the funded amount. If the lender charges a 2–3% origination fee, your actual advance is smaller than the headline amount — which inflates the effective APR further. Always confirm the net funded amount before calculating.
When an MCA Is Worth the Cost
Despite the APR, MCAs serve a real purpose. Consider one when:
- The return on invested capital clearly exceeds the APR. A restaurant that needs $25,000 for kitchen equipment to service a catering contract worth $80,000 over 6 months can afford a 90% APR advance — the math still works.
- You can’t qualify for alternatives. Less than 1 year in business, personal credit below 625, or inconsistent revenue may disqualify you from every cheaper product. An MCA requires typically 4+ months in business, $10,000/month in revenue, and no open bankruptcies — a lower bar than almost any other lender.
- You need same-day or next-day funding. An SBA loan takes 30–90 days. An online term loan takes 1–5 days. An MCA can fund in hours. If a time-sensitive deal is closing today, speed has real monetary value.
- Your cash flow is variable. Unlike fixed monthly loan payments, MCA holdbacks are a percentage of daily card revenue — payments drop automatically when sales slow. For seasonal businesses, that structure can be meaningfully less stressful than a fixed obligation.
If none of those four conditions apply, a line of credit or term loan will almost always be the better choice. The Funding Quiz can help you identify which product fits your situation before you apply anywhere.
All APR estimates in this article use the IRR method with 252 business days per year and 21 business days per month, matching the Business Cash Guide calculator. Individual offers vary; always confirm the net funded amount, holdback percentage, and estimated repayment term before comparing APRs.
Frequently Asked Questions
What is the difference between a factor rate and an APR?
How do I convert a factor rate to APR without a calculator?
Is a 1.30 factor rate a good deal?
Why is the effective APR so much higher than the flat-rate APR?
When does a high-APR merchant cash advance make sense?
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