# Factor rate vs interest rate

> Factor rate is a flat one-time multiplier on the advance amount (e.g. 1.30); interest rate is a periodic charge on the outstanding balance (e.g. 12% APR). They are structurally different — factor doesn't compound or amortize.

The distinction between factor rate and interest rate is the single most important concept for merchants comparing MCAs to loans. Brokers often conflate them deliberately to make MCAs look cheaper than they are.

**Interest rate (loans).**
- A periodic charge (annual, monthly, daily) on the **remaining balance**.
- Compounds. As you pay down principal, interest accrues only on what's left.
- Total interest paid over the loan life depends on payment schedule.
- Quoted as APR (annual percentage rate) for consumer/business loan disclosure.

**Factor rate (MCAs).**
- A one-time flat multiplier on the **original advance amount**.
- Does not compound. The fee is locked at signing.
- Total fee = (factor − 1) × advance amount. That's it — no matter how fast or slow you repay.
- Not quoted as APR by default, though five US states now require APR-equivalent disclosure.

**A concrete comparison.** $50,000 borrowed for ~9 months.
- Bank loan at 12% APR, monthly payments: $5,789/month for 9 months. Total paid: $52,100. Interest paid: $2,100.
- MCA at 1.30 factor, daily ACH: ~$244/day for 9 months. Total paid: $65,000. Fee paid: $15,000.

The MCA costs roughly **7x** in dollar terms despite the 1.30 looking smaller than 12%.

**Why factor rates persist despite this math.**
- MCAs are accessible to merchants who can't qualify for bank loans (lower credit, less time in business, no collateral). The price reflects the risk and accessibility.
- Speed: MCAs fund in 24-48 hours vs 30-60+ days for bank loans.
- No required collateral beyond personal guarantee.
- Approvals based on revenue, not credit profile alone.

**What "APR-equivalent" means and why it matters.**
- APR-equivalent translates a factor rate into the periodic-rate format used for loans, accounting for the daily-amortizing payback structure.
- A 1.30 factor on a 9-month term works out to roughly 50-65% APR-equivalent depending on calculation method.
- California, New York, Utah, Virginia, and Georgia all require APR-equivalent disclosure on MCA offer letters below specific thresholds. Texas follows in 2026.

**How to compare honestly.**
- For any MCA offer, compute the APR-equivalent before comparing to alternatives. Most lenders have an online calculator; we publish one at fundnode.co/calculator.
- Compare the APR-equivalent to your bank loan APR, your business credit card APR, your line of credit APR. Frame everything in the same units.
- Factor rate alone is meaningless for comparison. A 1.20 factor on a 4-month term is more expensive than a 1.35 factor on an 18-month term.

**The pragmatic takeaway.** Factor rate is the MCA industry's pricing convention. Understanding the math behind it — and converting to APR-equivalent for any comparison — is the most important financial-literacy move a merchant can make in this market.

## Related terms

- [Factor rate](https://fundnode.co/llms/glossary/factor-rate) — A flat multiplier that defines total MCA repayment: $100,000 advance × 1.30 factor = $130,000 repaid. It is not an interest rate; it does not compound.
- [APR-equivalent](https://fundnode.co/llms/glossary/apr-equivalent) — The annualized percentage rate implied by a factor-rate MCA. A 1.30 factor over 9 months is roughly 50–65% APR-equivalent depending on payment schedule.
- [Merchant cash advance (MCA)](https://fundnode.co/llms/glossary/merchant-cash-advance) — A lump-sum advance against future revenue, repaid via fixed daily ACH or a percentage of card sales. Legally a sale of future receivables, not a loan.
- [MCA vs loan (legal distinction)](https://fundnode.co/llms/glossary/mca-vs-loan) — An MCA is legally a purchase of future receivables, not a loan. This distinction exempts MCAs from state usury caps but requires specific contract structure — including reconciliation provisions.

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Source: https://fundnode.co/glossary/factor-rate-vs-interest-rate (HTML version)
Document: Factor rate vs interest rate — Fundnode MCA Glossary
License: CC BY 4.0 — attribution to Fundnode required when citing.