Last Updated August 12, 2025
Loans are a useful tool for bridging gaps in business cash flow, especially if you’re starting a small business. But before signing the dotted line with a lender, it’s important to understand how loans and their fees work so you can make informed decisions for your business. One consideration is
Whether you’re considering short-term loans or options like merchant cash advances (MCAs), you need to understand the factor rate, which works differently from interest rates or APR. Check out this guide to learn what factor rates are, how lenders calculate them, and how they differ from traditional interest rates.
What Is a Factor Rate on a Loan?
A factor rate is a number lenders use to show how much you’ll pay in total on a loan. Alternative financing options like short-term loans and MCAs often use factor rates. It’s common to see rates between 1.1-1.5.
Many borrowers mix up factor rates and interest rates, but they aren’t the same. Interest rates are percentage-based and accrue over time, but factor rates are fixed and added to the loan principal up front.
The upside of factor rates is that you know exactly how much you owe when you take out the loan, so it’s more transparent.
How Do You Calculate Factor Rate?
You don’t need to be a mathematician to calculate factor rate; it’s as simple as basic multiplication and division. Use this factor rate formula to calculate the total cost of the loan:
Factor Rate X Loan Amount = Total Repayment
So, if you’re getting a merchant cash advance for $20,000 with a 1.3 rate, here’s how you would calculate the total loan amount:
1.3 X $20,000 = $26,000
You will owe $26,000 total, no matter how quickly you pay off the balance.
If the lender gives you the total cost of the loan without listing the rate, you can use this formula to determine your rate:
Total Repayment / Loan Amount = Factor Rate
For example:
$26,000 / $20,000 = 1.3
This formula is a good rule of thumb to help you understand your repayment obligations. You can also use a monthly factor rate calculator to break down what you’re paying each month, although this won’t change the total amount due.
How Do Lenders Determine Factor Rates?
Most factor rates range from 1.1 to 1.5. Lenders use various data points to determine where your factor rate falls on that scale, including:
- Revenue and cash flow: The more revenue you generate consistently, the lower your factor rate will be. Lenders will sometimes ask to see your bank statements to ensure you have enough incoming cash to support repayment.
- Business history: How long have you been in business? Lenders tend to give lower rates to more established businesses. If you’re starting a new business, you may face higher factoring rates because of your lack of history.
- Industry: Some industries, like construction, are inherently risky. If you work in an industry with higher rates of default, lenders will probably give you a higher factor rate.
- Business credit score and borrowing history: Lenders will check both your personal and business credit scores to assess the risk of lending to you. Fortunately, if you’ve previously paid off similar loans in the past, it could have a positive impact on your rate.
- Loan details: You could reduce your factor rate by asking for a smaller amount of money or a shorter repayment period.
- Collateral: If the loan is unsecured, which means you don’t put up collateral like your car or a savings account, you’ll likely have a higher factor rate. On the flipside, you can reduce the figure by offering collateral to the lender, which reduces their liability.
Each lender will weigh these factors differently. When in doubt, get a quote from a few lenders to better understand what a fair factor rate is for your situation. Pay attention not just to the factor rate, but also any additional fees or repayment terms to find the best option.
What Is the Difference Between a Factor Rate vs. Interest Rate?
A factor rate is a number expressed as a decimal. This figure clearly tells you how much the loan will cost. For example, if a lender says the total cost of the loan is $25,000 after calculating the factor rate, $25,000 is what you’ll pay regardless of how long it takes to pay back the loan.
Interest rates, on the other hand, are percentage-based and accrue over time. The faster you pay off the loan, the less interest you pay, and vice versa. With interest rates, the amount you pay depends on the loan term and how fast you repay. With factor rates, time doesn’t matter—you’ll pay the same total amount whether you repay in six months or one year.
Since interest is based on time and the loan principal, it can be difficult to estimate the total cost of the loan over time.
| Factor Rates | Interest Rates |
| Expressed as a decimal, such as 1.1 or 1.25 | Expressed as a percentage, such as 12% |
| Fixed amount regardless of time | Accrues over time |
| Common with MCAs | Common with more traditional term loans, credit cards, and mortgages |
| Easy to see the total cost up front | Difficult to know the true total cost up front |
How to Convert a Factor Rate to an Interest Rate
Factor rates don’t account for time, so they can be harder to compare side-by-side with more traditional loans unless you convert it to an interest rate. Use this simplified formula for an apples-to-apples comparison:
- Subtract 1 from the factor rate. For example: 1.25 − 1 = 0.25
- Multiply by 365 (days in a year): 0.25 × 365 = 91.25
- Divide by the number of days in your repayment term. If your loan term is 120 days: 91.25 ÷ 120 = 0.7604
- Multiply by 100 to get the percentage interest rate. 0.7604 × 100 = 76.04% annualized interest rate
That means a factor rate of 1.25 over a 120-day loan translates to a 76% annual interest rate, which is higher than most traditional loans. If you’re considering a traditional loan versus a loan with a factor rate, use this calculation to understand which option works best for your needs.
What Is the Difference Between a Factor Rate vs. APR?
Annual percentage rate (APR) might sound like the same as an interest rate, but it isn’t. APR includes the interest rate in its calculation, but it also includes any potential fees or costs associated with the loan. APR is expressed as a yearly percentage and tends to provide a better picture of what you’ll actually pay over time.
Factor rates, on the other hand, are a flat multiplier. Your cost is fixed from day one, and it doesn’t change based on how quickly you repay. Since factor rates don’t account for time, they can make short-term financing look deceptively affordable.
This distinction is why many business owners look to convert a factor rate to APR, especially when comparing financing offers from traditional lenders vs. alternative ones.
| Factor Rates | APR |
| Expressed as a decimal, like 1.25 | Expressed as a percentage, like 30% |
| Fixed payment regardless of time | Cost depends on the length of the loan |
| Common in MCAs and alternative loans | Common in traditional loans and credit cards |
| Doesn’t include fees in calculation | Includes fees in calculation |
How to Convert a Factor Rate to APR
While factor rates make it easy to see your total repayment, they don’t show the full cost of borrowing over time. Always convert a factor rate to APR to compare your funding options. Follow these steps to convert factor rates to APR:
- Calculate total repayment first: Loan Amount × Factor Rate = Total Repayment. For example: $50,000 × 1.3 = $65,000
- Calculate total borrowing cost with this formula: Total Repayment − Loan Amount = Total Borrowing Cost. That would look like: $65,000 − $50,000 = $15,000
- Annualize the cost: Total Borrowing Cost ÷ Loan Term (in years) = Annualized Cost. If your term is 6 months (0.5 year), that would be: $15,000 ÷ 0.5 = $30,000
- Calculate the APR: (Annualized Cost ÷ Loan Amount) × 100 = APR. For example: ($30,000 ÷ $50,000) × 100 = 60% APR
This result shows that a factor rate of 1.3 on a 6-month loan equates to a 60% APR, which is high—the average credit card APR is around 24%.
In-Summary: What Is a Factor Rate?
Factor rates are a less common way for lenders to determine the total cost of extending you a loan. Unlike a traditional interest rate or APR, a factor rate is fixed and doesn’t change based on how quickly you repay.
While it’s simple to use, the factor rate formula doesn’t show the full borrowing cost over time. That’s why it’s important to compare it with an interest rate, and even convert a factor rate to APR when weighing your financing options. Apples-to-apples comparisons will help you avoid expensive loans and make the best possible decision to support your business’s growth.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
