Factor rates exist because they make expensive money sound cheap. A quote of "1.3" reads as thirty percent. Converted properly, a 1.3 factor on a twelve-month daily-repayment advance is an APR closer to sixty percent.
The gap is not a trick of presentation. It comes from a genuine difference in what the two figures measure.
#What a factor rate is
A factor rate is a simple multiplier on the amount advanced.
Total repayment = advance × factor rateBorrow $100,000 at a factor of 1.30 and you repay $130,000. That is fixed regardless of how quickly you repay. There is no interest accruing on a balance — the whole charge is determined upfront.
#Why the APR is roughly double
Interest rates measure the cost of money over time on the balance outstanding. That distinction is what creates the gap.
With a merchant cash advance you repay daily or weekly, usually as a fixed percentage of card receipts or a fixed daily debit. By month six you have repaid roughly half the total, so your average outstanding balance over the year is about half the original advance.
You are paying $30,000 for the use of an average balance near $50,000 across one year. That is a cost of roughly 60%, not 30%.
The rule of thumb: for a fully amortising advance, APR is approximately twice the simple factor charge. A 1.20 factor over twelve months is roughly 40% APR. A 1.49 factor over nine months can exceed 100%.
The business loan calculator performs the conversion properly by computing the internal rate of return on the actual payment schedule, which is the only accurate method.
#Term length changes everything
This is the counterintuitive part. With a factor rate, repaying faster costs more in APR terms, because the same fixed charge is compressed into a shorter period.
A $100,000 advance at 1.30:
| Repayment term | Total repaid | Approximate APR |
|---|---|---|
| 6 months | $130,000 | ~110% |
| 9 months | $130,000 | ~78% |
| 12 months | $130,000 | ~59% |
| 18 months | $130,000 | ~39% |
There is no early repayment discount on most advances. Paying off in month four does not reduce what you owe; it simply concentrates the charge into a shorter period and raises the effective rate.
Some providers offer a partial discount for early settlement. Ask explicitly, and get it in writing, because it changes the calculation substantially.
#The holdback problem
Merchant cash advances typically take a fixed percentage of daily card receipts — the holdback. It is presented as a feature: when sales are slow you repay less.
The reality is that the holdback is applied to gross revenue, before any of your costs. A 15% holdback on a business running a 20% net margin is taking three quarters of your profit before you pay rent, wages or suppliers.
That mechanism is what makes advances difficult to escape. The repayment is deducted before you see the money, so the pressure on working capital is continuous.
#When an advance is still the right choice
There are legitimate cases, and they share a shape: short duration, high certainty of return, no alternative.
A time-limited opportunity with a known return. Inventory at a genuine discount that you are confident of selling within the term.
A short bridge to a known receipt. A confirmed large contract payment sixty days away, where the advance is repaid from it.
Genuine emergency with no alternatives. Expensive capital beats a closed business.
What these have in common is that the money is repaid quickly from a specific, identified source. An advance used to fund general operating shortfall is the beginning of a cycle, because the holdback reduces the cash flow that created the shortfall.
#What to check before signing
Total repayment amount in dollars, not the factor rate.
The holdback percentage and what revenue base it applies to.
Whether early repayment reduces the total. Usually it does not.
Whether a confession of judgment is required. In some jurisdictions this allows the lender to obtain a judgment without a hearing. Treat it as a serious red flag.
Stacking restrictions. Taking a second advance while one is outstanding usually breaches the first agreement and is the single most common route to business failure among advance borrowers.
#What to compare it against
Before accepting a factor-rate product, get quotes for: an SBA 7(a) or express loan, a bank line of credit, a credit union term loan, equipment finance if the use is an asset, and invoice factoring if the need is receivables timing.
All of these are cheaper. They are also slower and require more documentation, which is exactly what the advance industry sells against. If your need genuinely cannot wait three weeks, that urgency is worth pricing honestly — run every offer through an APR conversion first.
Frequently asked questions
How do I convert a factor rate to APR?
Compute the internal rate of return on the actual payment schedule and annualise it. As a rough guide, a fully amortising advance has an APR of roughly twice the simple factor charge — a 1.30 factor over twelve months is near 60% APR.
Is a merchant cash advance a loan?
Legally it is usually structured as a purchase of future receivables rather than a loan, which is how it sits outside much lending regulation including usury caps. Commercially it functions as a very expensive loan.
Does repaying an advance early save money?
Usually not. The total repayment is fixed at the outset, so repaying early simply compresses the same charge into a shorter period and raises the effective APR. Some providers offer a discount — ask explicitly and get it in writing.