A factor rate is a decimal multiplier used on short-term business loans and merchant cash advances instead of an interest rate. It determines the total repayment amount upfront — not based on time. A 1.3 factor rate on a $100,000 advance means you repay $130,000 total, regardless of how long repayment takes.
Definition
Factor rate: A decimal multiplier used on short-term loans and merchant cash advances instead of an interest rate. It sets the total repayment upfront: a 1.3 factor rate on $100,000 means you repay $130,000, however long repayment takes.
See all business financing definitions| Financing type | Business Financing |
|---|---|
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In detail
Unlike interest rates that accrue over time, a factor rate is fixed at origination. Lender calculates: advance amount × factor rate = total repayment. A $50,000 advance at 1.25 = $62,500 total repayment. You pay that amount regardless of whether repayment takes 6 months or 18 months.
In detail
Interest rates are periodic — they charge you more the longer you hold the loan. Factor rates are static — early payoff does not reduce the total you owe. This makes early repayment of factor-rate products far less beneficial than on interest-bearing loans. Always calculate total repayment (not monthly payment) when comparing.
In detail
Factor-rate products (working capital, revenue-based financing) make sense when you need capital fast, have challenged credit, or need flexibility in repayment. They are not the cheapest option for businesses that qualify for interest-bearing term loans — but they are the most accessible.
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Divide the total repayment amount by the advance amount, subtract 1 to get the total cost rate, then annualize based on expected repayment period. A 1.3 factor rate repaid over 12 months is approximately 60% APR. Over 6 months, it is approximately 120% APR — which illustrates why faster repayment increases effective APR on factor-rate products.
It depends on the term. A 1.2 factor rate on a 12-month loan is roughly 40% APR — expensive compared to a bank term loan but typical for accessible working capital. On a 6-month advance it is about 80% APR. Always compare total cost of capital across all your options.
No. Standard term loans use interest rates (APR or simple interest). Factor rates are used on merchant cash advances, revenue-based financing, and short-term working capital advances. If a lender quotes you a term loan with a factor rate instead of an interest rate, ask for the APR equivalent.
No. A factor rate is a fixed multiplier that sets the total repayment upfront, while an interest rate is charged over time on the balance. Paying a factor-rate advance early may not reduce what you owe, so compare total repayment or APR.
Written by lendfloCapital Editorial Team · Last updated
lendfloCapital is a business financing broker, not a lender. This page is general information, not financial, legal or tax advice. Rates, amounts and terms depend on the lender and your business.
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