If you're exploring Merchant Cash Advances, you'll quickly encounter the term 'factor rate.' Unlike traditional loans that use APR, MCAs price their cost as a factor rate. Understanding how this works is essential before accepting any MCA offer.
What Is a Factor Rate?
A factor rate is a multiplier applied to your advance amount to determine total repayment. Advance Amount × Factor Rate = Total Repayment. A $100,000 advance at a 1.30 factor rate = $130,000 total repayment. The cost is $30,000.
What Drives Your Factor Rate?
- Time in business: Older businesses get better rates
- Monthly revenue: Higher, more consistent revenue means lower rates
- Industry: Higher-risk industries carry higher rates
- Existing debt load: Multiple existing advances mean higher rates
Factor Rate vs. APR
Factor rates cannot be directly compared to APR. The equivalent APR depends on repayment speed. The same 1.30 factor rate represents a much higher effective APR on a 4-month advance than on a 14-month advance. This is why quick repayment of an MCA actually results in a higher annualized cost.
How to Evaluate an Offer
Focus on three things: (1) Total dollar cost of the advance. (2) Daily payment amount — can your cash flow support it? (3) Business value — will this capital generate more than it costs? If the answer to #3 is clearly yes, the MCA is likely a good business decision.