Factor rates · Written by a working underwriter
Every MCA offer comes with a factor rate, not an interest rate — and that one difference is where most business owners lose track of what they're actually agreeing to pay. Here's the math underwriters use, and how to turn a factor rate into a number you can actually compare.
An interest rate — an APR — is a percentage charged on the balance you still owe, calculated over time. As you pay down principal, the amount you're paying interest on shrinks. Pay a loan off early and you pay less interest overall. Time works in your favor.
A factor rate works differently. It's a flat multiplier applied to the full amount funded, set the moment the advance is approved. It doesn't compound and it doesn't shrink as you pay it down — and critically, it usually doesn't change even if you pay the whole thing off early. Whether the advance runs the full term or gets paid off in half the time, the total dollar cost is typically the same fixed number agreed to at signing.
The formula is simple: total payback = amount funded × factor rate. On a $50,000 advance at a 1.35 factor rate, that's $50,000 × 1.35 = $67,500 total payback. The cost of capital is $17,500 — that's the number that actually matters, not the "1.35."
$50,000 advance at a 1.35 factor rate
$17,500 cost of capital — fixed regardless of how fast the advance is repaid.
"Business owners almost always remember the factor rate they were quoted. Almost none of them can tell me the actual dollar amount they agreed to pay back. Those are two very different conversations."
Ready4Fund underwriting teamTo compare a factor rate against a loan's APR, you need the term length too: estimated APR ≈ ((factor rate − 1) ÷ term in months) × 12 × 100. The same factor rate produces a wildly different annualized cost depending purely on how long it takes to repay.
A 1.35 factor rate at three different terms
Estimated APR, not a legal or binding calculation — actual cost depends on the lender's specific repayment structure.
An MCA isn't legally structured as a loan — it's a purchase of a fixed portion of your future receivables, repaid through a percentage holdback of daily or weekly sales, or a fixed debit that approximates one. Because repayment speed can shift with revenue, the payoff date isn't locked in at signing the way it is with an amortizing loan, which is part of why a time-based rate doesn't map onto it cleanly.
Federal Truth in Lending disclosure rules were written for consumer credit and don't apply to commercial financing, which is part of why MCA providers have historically quoted a factor rate rather than an APR. That's shifting — a growing number of states now require commercial financing providers to disclose an estimated APR-equivalent alongside the factor rate. Regardless of what your state requires, you can always ask the lender directly for the estimated APR and get it in writing.
Underwriters aren't picking a factor rate out of thin air. It's priced off a handful of specific risk signals in your file:
"Two businesses with identical revenue can get quoted completely different factor rates. The number on top of the bank statement is rarely the whole story — it's the consistency underneath it that actually sets the price."
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This page is for informational purposes only and does not constitute financial advice. Funding approval depends on individual lender criteria and is not guaranteed.