Factor rate

A pricing model used by merchant cash advances and some online business loans where you owe principal × factor regardless of payoff timing.

Reviewed May 2026.

Unlike a traditional APR-based loan where interest accrues over time, a factor-rate product has the total cost baked in at origination. A factor of 1.3 on $50,000 means you owe $65,000 in total — no matter how fast or slowly you pay it back. There is no remaining-balance interest, no daily accrual, no amortization schedule. The contract specifies the principal, the factor, the holdback (the % of daily receipts the funder pulls), and the expected term.

This is the part that breaks prepayment math. On a traditional loan, paying early saves the future interest you would have paid. On a factor-rate product, the full factor is typically owed regardless of payoff timing, so prepayment usually does not save money. Some merchant cash advances include an early-payoff discount clause; some online short-term lenders price in a 'prepayment savings' table. Neither is standard. Read the contract before you assume an early payoff buys you anything.

Factor rates are most common on merchant cash advances, but some online business lenders also use them on 6–18 month working-capital loans. The effective APR depends entirely on how fast the holdback collects the full owed amount — fast collection on a high-revenue business can push effective APR above 100%, while a slow collection on a thinner-margin business sits in the 30–60% range. These are cash-flow tools for businesses that cannot wait three weeks for a conventional bank decision, not low-cost financing.

The other thing factor rates do not give you: a normalized comparison. A 1.3 factor on a 6-month repayment is a very different deal from a 1.3 factor on a 12-month repayment, even though the headline number is identical. Converting to effective APR is the only honest way to put two factor-rate offers next to each other, or to compare a factor-rate offer against a conventional rate-based loan.

PayoffMath angle. Standard PayoffMath rules don't apply to factor-rate debt. Extras and lump-sum prepayments usually save nothing — the full factor is owed regardless of timing. If a business has factor-rate debt, paying down a conventional amortizing loan first usually saves more total dollars per extra dollar deployed.

Why it matters. Factor rates are quoted as small numbers (1.20, 1.35) that feel cheaper than they are. Converting to an annualized APR is the only fair comparison to a bank loan or a credit card. The same 1.30 factor can be a 40% APR or a 130% APR depending on the term.

Common mistake. Thinking a factor rate is interest. A 1.3 factor is not '30% interest' — it's $1.30 owed for every $1 borrowed, paid over the term regardless of how the schedule plays out. The closest accurate translation is total cost of borrowing, not interest rate.

Try the small business loan payoff calculator → — compare a factor-rate offer's effective APR against a conventional small-business loan.

Worked example

Example: a $50,000 merchant cash advance with a 1.3 factor and ~12-month expected payback through a 12% daily-receipts holdback. Total owed = $65,000. Pay it off in month 6 and you usually still owe the remaining $32,500 — not a discounted balance. Effective APR ≈ 50%. The same 1.3 factor with a 6-month payback runs an effective APR closer to 100%, because the same total cost is compressed into half the time.

See also

Sources and review

Reviewed May 2026. Glossary entries are plain-language definitions, not legal definitions. For account-specific rules, your loan documents control.

Definition by James L. Wu. Plain-language gloss, not a legal definition. For terms that show up in your loan paperwork, the governing language is in your loan documents. See the editorial policy for sourcing.