A factor rate looks reassuringly small. It arrives as a decimal, 1.25, 1.35, 1.49, and the natural instinct is to read it the way you read every other rate in your financial life: as some percent per year. That instinct is wrong in a way that costs merchants real money, because a factor rate is not a rate at all. It is a one-time multiplier, and the difference between a multiplier and an interest rate is the single most misunderstood piece of arithmetic in business funding.
This article does the whole thing with a pencil: what the number means, what it hides, how brokers move it, and how to translate any factor into a figure you can compare against a loan. Ten minutes here, and no rep will ever be able to talk past you with a decimal again.
The multiplication, and what is missing from it
The mechanics take one line. Advance amount times factor rate equals payback amount. A $25,000 advance at a factor of 1.40 means you repay $25,000 times 1.40, which is $35,000. The cost of the money is the difference: $10,000, fixed the moment you sign.
Now notice what the multiplication does not contain: time. An interest rate is money per time, some percent per year, which is why a loan's total cost depends on how long you hold the balance. A factor rate has no time inside it. Whether the payback runs six months or sixteen, the $35,000 is $35,000. The cost of the money was decided at signing, and the calendar cannot change it.
That missing dimension has two practical consequences. First, repaying early does not shrink the cost by default: you simply pay the same $10,000 for fewer months of money, which makes the money more expensive per month, not less. Some contracts add a prepayment discount schedule that genuinely reduces the payback at early milestones, and it is always worth asking for one in writing. Second, comparing a factor rate digit-for-digit against an interest rate, reading 1.40 as forty percent a year, understates the true cost badly, for reasons the next section makes concrete.
Why 1.40 costs far more than 40% a year
Stay with the worked example: $25,000 at 1.40, repaid by daily debits over about six months, roughly 126 business days at about $278 per business day. The $10,000 cost against $25,000 reads as forty cents per dollar, and since the deal runs half a year, doubling to eighty cents per dollar per year seems like the annualized answer. It is still an underestimate.
Here is the part everyone misses: you never have the whole $25,000 for the whole term. The first debit lands the day after funding, and your outstanding balance falls every single business day, from all of the money down to none of it. On average across the term, you had use of only about half the advance, roughly $12,500. So the honest question is what it costs to use about $12,500 for six months, and the answer is $10,000, which is eighty cents per dollar for half a year. Annualized, this illustrative deal prices out in the neighborhood of 160% a year, before fees, roughly four times what the decimal seemed to whisper.
No individual step in that arithmetic is exotic, and none of it is printed on a typical offer. The federal rules that force consumer lenders to disclose an APR, Regulation Z under the Truth in Lending Act, generally do not reach business-purpose financing, and only a handful of states require APR-style disclosure on commercial offers. Between those gaps, the translation from factor to annual cost is your job, which is exactly why the MCA calculator does it in one click, and why the full version of this math, worked against loans and lines, lives in the true cost of a merchant cash advance.
Buy rates, sell rates, and where the broker lives
The factor on your contract is usually not the factor the funder quoted. Funders issue approvals to brokers at a buy rate, say 1.28 on a given file, and permit the broker to present a higher sell rate, say 1.36, with the spread funding some or all of the broker's commission. Two points of factor on a $25,000 advance is $2,000, real money that moved because of a number you never saw.
This is not a scandal, it is a compensation structure, and an honest broker will discuss it plainly. But it has a practical consequence: the factor rate is often the most negotiable number on the page, because part of it is markup rather than the funder's risk price. Asking directly what the spread is, and whether any of it can move, costs nothing. How the economics work from the broker's side of the table, including what commissions do to the offers you see first, is laid out in how MCA brokers get paid.
What actually sets your factor
Funders price factors to risk, file by file. Knowing the levers tells you which ones you can pull before applying.
- Deposit strength and consistency. Steady monthly revenue with a healthy account balance prices best; swinging deposits and negative days price worst, because the funder is buying your future receipts.
- Position. A funder collecting behind an existing advance, in second or third position, is taking more risk and charges a higher factor for it.
- Term length. Shorter paybacks often carry lower factors but heavier payments; longer paybacks the reverse. The factor and the term have to be read together, never alone.
- Industry and seasonality. Volatile or hard-to-collect industries price higher than steady ones, and a seasonal trough on your statements shows up in the decimal.
- Time in business and credit. Both matter less than bank activity, but a young file or a rough score still nudges the factor upward.
Fees make the printed factor an understatement
The factor multiplies the full advance, but fees are subtracted from it before the wire goes out. Take the worked example with a $1,250 origination fee: you owe $35,000, but only $23,750 reached the account. Your effective multiple is $35,000 divided by $23,750, about 1.47, not the 1.40 on the page. The bigger the fee load, the wider that gap, and every fee dollar is charged the factor as if you had received it.
The defense is one habit: always compute cost on net funded, the money that actually lands, never on the contract amount. The fee taxonomy, origination, PSF, ACH program fees and the rest, has its own article in the fees nobody explains.
So what is a good factor rate?
The honest answer: there is no universal good number, and anyone quoting you one before reading your file is guessing or baiting. The same 1.35 can be a fair price on a risky file and a poor one on a strong file. What you can always do is judge an offer on its own terms, in three steps: translate the factor into total dollar cost, annualize it with the calculator, and weigh that against what the money will earn and what alternatives your file can actually reach, side by side in the offer comparison tool if you hold more than one.
The factor rate is the beginning of understanding an advance, not the end. It tells you the cost of the deal in one multiplication, hides the cost per year in its silence about time, and leaves fees and terms to do their work in the fine print. Read all three layers and the decimal holds no more surprises.
Frequently asked questions
What does a 1.35 factor rate mean in dollars?
Multiply the advance by the factor: a $30,000 advance at 1.35 means repaying $40,500, so the money costs $10,500. That cost is fixed at signing and does not shrink with early repayment unless the contract includes an explicit prepayment discount schedule.
Is a factor rate the same as APR?
No, and the gap is large. APR expresses cost per year on the balance you actually hold; a factor is a one-time multiplier with no time dimension. Because repayment starts immediately and your average balance is roughly half the advance, a short-term factor deal annualizes to a much higher figure than the decimal suggests, often several times higher.
Can a factor rate be negotiated?
Often, yes, because the contract factor frequently includes broker markup above the funder's buy rate, and that spread can move. Competing approvals are the strongest lever: a funder or broker facing a real alternative offer finds flexibility that a captive applicant never sees. Ask what the spread is, and get any improvement in writing on the agreement itself.
Why did my offer's factor rate change after underwriting?
Initial quotes are estimates made before anyone verified your file. Once underwriting reads the actual statements, balance, positions and industry, the risk price gets real, and the factor moves with it. A moved number with a clear explanation is normal; a firm promise made before anyone read your file was never a real number, which is a warning sign covered in spotting a predatory offer.