Factor Rate

The mechanics fit on one line: advance amount times factor rate equals payback amount. Suppose an invented file, $20,000 advanced at a factor of 1.30. The payback is $26,000 and the cost of the money is the $6,000 difference. Notice what the multiplication never asks: how long the repayment takes.

That missing dimension is the whole point of the term. An interest rate is money per unit of time, which is why a loan costs more the longer you carry it. A factor rate has no time inside it, so in that invented example the $6,000 is $6,000 whether the ACH remittance finishes in five months or eleven. Repaying early therefore does not shrink the cost by default; it buys fewer months of money for the same price. Some agreements add an explicit prepayment discount schedule, and asking for one in writing before signing beats discovering its absence afterward.

Funders set the factor against the risk they read in your file: how steady the deposits are, whether the account touches zero, what position a new funder would occupy behind an existing advance, the length of the term, the industry, and your time in business. Some of those levers you can move before you apply, which is the practical reason to know what the number is made of.

There is one more layer, and nobody volunteers it. The factor printed on your contract is frequently higher than the buy rate at which the funder actually approved your file, with the difference paid to the broker as compensation. That makes the factor one of the more negotiable figures on the page, and how MCA brokers get paid lays out the economics from the other side of the table.

The confusion that costs the most money is reading the decimal as an annual rate. Repayment starts almost immediately and your outstanding balance falls with every debit, so across the term you have the use of only about half the advance. Annualize honestly and a short factor deal prices far above what the decimal seems to whisper. The MCA calculator does that translation in one step, and the true cost of a merchant cash advance works it out by hand.

The second confusion is treating the factor as the whole price. Fees are deducted from the advance before the wire lands, while the factor multiplies the full approved amount, so your effective multiple on the money that actually reached the account is always higher than the number on the page. Compute cost on what landed, never on what was approved.