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Factor rate vs interest rate
A factor rate sets a fixed total to repay; an interest rate charges for time on a balance. See why the same-looking numbers cost very different amounts.
The short answer
A factor rate is a multiplier that fixes the total you repay — 1.30 on $50,000 means repaying $65,000, however fast. An interest rate charges a percentage per year on the balance you still owe, so cost depends on time. Because a factor rate ignores time, a short advance with a modest-looking factor can cost far more per year than a loan with a higher-looking rate.
Side by side
| Feature | Factor rate | Interest rate |
|---|---|---|
| Written as | A decimal, like 1.30 | A yearly percentage, like 18% |
| Charges for | The whole amount, once | The balance still owed, over time |
| Total cost | Fixed: amount × (factor − 1) | Falls as you repay; depends on the term |
| Paying early | Usually saves nothing | Usually saves interest |
| Common with | Merchant cash advances, some short-term financing | Term loans, lines of credit, SBA loans |
| Comparing offers | Convert it to an estimated APR first | Compare APRs, which add fees to the rate |
Choose factor rate if…
- A factor-rate offer is the only fast option available
- You'll repay quickly from sales that are already coming in
- You've converted it to an APR and still accept the cost
Choose interest rate if…
- You can qualify for a loan or a line
- You want paying early to lower your cost
- You're comparing several offers and want one yearly measure
What it costs on the same amount
$50,000 over about six months. Illustrative terms only.
Factor rate
1.30 factor rate over 126 business days
- Payment
- $515.87 a business day
- Repaid over
- about 6 months (126 business days)
- Total cost (interest + fees)
- $15,000.00
- Yearly cost (APR)
- ~109.3%
Interest rate
30% interest rate over 6 months
- Payment
- $9,077.50 a month
- Repaid over
- 6 months
- Total cost (interest + fees)
- $4,464.99
- Yearly cost (APR)
- 30.0%
The factor rate sounds smaller than 30%, yet costs over three times as much over the same six months.
Questions owners ask
How do I convert a factor rate to an APR?
You need the factor rate, the amount, any fees and how long repayment takes. The factor rate calculator does the math, including repayment from a share of card sales.
Is a factor rate of 1.2 the same as 20% interest?
No. 1.2 means paying 20% more than you received in total, often within months. A 20% interest rate is charged per year on a falling balance, so it costs much less over the same short period.
Why don't advances use interest rates?
Merchant cash advances are usually structured as a purchase of future sales rather than a loan, so they are priced with a fixed payback. Some states now require them to disclose an estimated APR.
Terms on this page
APR (annual percentage rate)Cost of capitalFactor rateInterest rateMerchant cash advance
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Comparisons and examples are for education only, use illustrative terms, and are not an offer or commitment to lend. Actual rates, fees and terms depend on each provider’s review. ScaleKit Financing is operated by Arch Ventures LLC and is not a lender.