Factor rates, decoded
If you remember one thing: a factor rate is a multiplier, not an interest rate — and the difference is worth tens of thousands of dollars.
The 30-second version
Take $50,000 at a 1.3 factor rate: you repay $50,000 × 1.3 = $65,000. The $15,000 difference is the cost. So far, so simple — and it looks like "30% interest."
Here's what the label hides. Interest rates are quoted per year, on the balance you still owe. A factor rate is neither: the full $15,000 is owed no matter what, and you typically repay through daily withdrawals over about six months. You give the money back almost as fast as you got it, while paying as if you'd kept it all year.
The receipt: $50,000 · factor 1.3 · 6-month term · daily payments of ≈$500 → an estimated annualized rate near 109% APR. Not 30%. Run your own numbers in the calculator.
What the common factor rates really cost
| Factor rate | "Feels like" | Est. APR at 6 months, daily payments | Est. APR at 12 months |
|---|---|---|---|
| 1.15 | 15% | ~55% | ~28% |
| 1.25 | 25% | ~91% | ~46% |
| 1.30 | 30% | ~109% | ~55% |
| 1.40 | 40% | ~145% | ~73% |
| 1.50 | 50% | ~180% | ~90% |
Notice the pattern: the shorter the term, the more violent the annualized cost. The same 1.3 factor over 12 months is half the APR of 6 months — because you kept the money twice as long for the same fee. Funders rarely volunteer this, which is why a "lower factor rate, shorter term" offer can cost more than a "higher factor, longer term" one.
Three fine-print traps
- Fees come off the top. A 3% "origination fee" on that $50,000 means you receive $48,500 but repay $65,000. Your true cost just went up — put the fee in the calculator and watch the APR move.
- No payoff discount. With a loan, paying early saves interest. With most advances, the full payback is owed regardless — early payoff can make the effective APR higher. Ask specifically about prepayment discounts; some funders offer them, most don't advertise it.
- Renewals restart the meter. "You're eligible for more funds" halfway through often means new fees on money you already paid fees on. This is where advances become a treadmill.
The one question to ask any funder
"What is the APR on this offer, including all fees?" — In California (and a growing list of states), commercial financing providers are required to disclose cost in annualized terms on many offers, and since 2026 California requires the APR alongside any quoted pricing metric. A funder who dodges an answer your state requires is telling you something.
An advance isn't automatically a bad product — speed and credit-flexibility have real value, and for a high-margin, short-term opportunity it can genuinely make sense. The problem is only ever buying it without seeing this number. See when it does and doesn't make sense in MCA vs. term loan.