# APR versus factor rate: how to compare them

Source: https://businessloanbroker.ai/guides/apr-vs-factor-rate/
Site: BusinessLoanBroker.ai (powered by Levr)

> APR versus factor rate with a worked example: a 1.3 factor rate on a six month advance works out to roughly 110% APR. See the math and a conversion table.

An APR is a yearly cost that includes interest and most fees, so you can compare loans of different lengths. A factor rate is a flat multiplier on the amount you receive, usually 1.1 to 1.5, and it ignores time. A 1.3 factor rate on a six month advance costs about the same as a loan with an APR of roughly 110%. Here is the math, a conversion table, and what to ask before you accept a factor rate offer.

## Key facts
- **APR:** Annual percentage rate: interest plus most mandatory fees, per year
- **Factor rate:** A multiplier on the advance, typically 1.1 to 1.5; 1.3 means you repay $1.30 per $1
- **Worked example:** 1.3 factor over 6 months with daily payments is roughly 110% APR
- **Rule of thumb:** APR is roughly double the simple annualized cost on a daily payment advance

## What is an APR?

APR stands for annual percentage rate. It is the yearly cost of borrowing, including interest and most required fees such as an origination fee, expressed as a percentage of what you borrowed. Because it is per year and it accounts for the balance falling as you repay, it lets you compare a two year loan with a six month one on the same scale.

Business lenders are not required to disclose an APR in most US states, although a few now require a similar disclosure. So you often have to calculate it yourself or ask. The [APR glossary entry](https://businessloanbroker.ai/glossary/apr/) covers what is included, and the [business loan calculator](https://businessloanbroker.ai/tools/business-loan-calculator/) shows the payment and total cost for any APR.

## What is a factor rate?

A factor rate is a multiplier applied once to the amount you receive. Multiply the advance by the factor rate and you get the total you repay. A $50,000 advance at a 1.3 factor rate means you repay $65,000. There is no interest accruing day by day, which is why paying early rarely saves money unless the contract offers a prepayment discount.

Factor rates are used by [merchant cash advance](https://businessloanbroker.ai/business-loans/merchant-cash-advance/) companies, some [revenue based financing](https://businessloanbroker.ai/business-loans/revenue-based-financing/) providers and some short term lenders. The number looks small, which is the problem. A 1.3 reads like 30%, but 30% over six months is not 30% a year, and you are not holding the full amount for six months either.

## Worked example: what is a 1.3 factor rate as an APR?

Take a $100,000 advance at a 1.3 factor rate, repaid over six months with daily payments on business days.

- **Total payback:** $100,000 multiplied by 1.3 equals $130,000. The fee is $30,000.
- **Simple annualized cost:** $30,000 divided by $100,000 is 30% for six months. Doubling it to a full year gives 60%.
- **Daily payment:** six months is about 126 business days, so $130,000 divided by 126 is about $1,032 per day.
- **Actual APR:** because you pay down the balance every day, your average outstanding balance is only about half of $100,000. Paying a $30,000 fee on an average balance of roughly $50,000 over half a year works out to an APR of about 109%, which we round to roughly 110%.

## Why is the APR roughly double the simple rate?

Because you never have the full amount for the full term. With daily or weekly payments the balance falls from day one, so by the midpoint you have repaid about half and you are still paying the fee calculated on the whole advance. The money you actually had on average is about half the face amount, which doubles the effective annual rate.

The shorter the term, the higher the APR for the same factor rate. A 1.3 factor rate over 12 months is roughly 55% APR; over 6 months roughly 110%. A renewal or a shorter term at the same factor rate is a large increase in annual cost even though the quoted number did not change.

## When does a factor rate product still make sense?

When the money earns more than it costs within the term, and nothing cheaper is available in time. Buying inventory at a discount you can resell in 60 days, covering a payroll gap while a large receivable clears, or taking a contract that needs upfront materials can all justify a short advance. The expected gain should clearly exceed the fee.

It does not make sense for long term needs, for refinancing another advance, or for covering ongoing losses. Stacking a second advance on a first is how businesses get into trouble, and most lenders refuse a stacked file. Check first whether a [line of credit](https://businessloanbroker.ai/business-loans/line-of-credit/) or [invoice financing](https://businessloanbroker.ai/business-loans/invoice-financing/) fits; they are usually cheaper for the same speed.

## What should you ask before accepting a factor rate offer?

Ask for five numbers in writing: the amount you will actually receive after fees, the total payback, the daily or weekly payment, the number of payments, and the APR equivalent. Then ask whether there is a prepayment discount, whether the payment is a fixed amount or a percentage of card sales (a [holdback](https://businessloanbroker.ai/glossary/holdback/)), and whether the contract includes a confession of judgment.

If the provider will not give you the total payback and the APR equivalent, do not sign. You can apply here and compare factor rate offers against term loans and lines side by side, or ask your AI assistant to apply for you through our MCP server; see the [agents hub](https://businessloanbroker.ai/agents/).

| Factor rate | Term | Fee per $100,000 | Approximate APR |
|---|---|---|---|
| 1.2 | 6 months | $20,000 | About 75% |
| 1.3 | 6 months | $30,000 | About 110% |
| 1.3 | 12 months | $30,000 | About 55% |
| 1.4 | 9 months | $40,000 | About 95% |
| 1.35 | 6 months | $35,000 | About 125% |

## Questions and answers
**Is a factor rate the same as an interest rate?**

No. An interest rate is charged on the balance over time, so the cost falls as you repay. A factor rate is applied once to the full advance, so the cost is fixed from day one regardless of how fast you repay. That is why it must be converted to an APR to compare it with a loan.

**Does paying a cash advance off early save money?**

Usually not, because the fee is fixed at the start. Some providers offer a prepayment discount, for example reducing the factor rate if you repay within 30 or 60 days, but you must ask and it must be in the contract. Without a discount clause, early payoff just raises your effective APR.

**Why do lenders quote factor rates instead of APR?**

Partly because cash advances are legally purchases of future receivables rather than loans in many states, so lending disclosure rules do not apply, and partly because a factor rate looks smaller. A few states now require APR style disclosures for commercial financing. Always ask for the APR equivalent.

**What factor rate is reasonable?**

Typical factor rates run from 1.1 to 1.5. A 1.1 to 1.2 over six to twelve months is the low end and usually goes to businesses with strong deposits. Anything above 1.4 on a term under six months is well over 100% APR and should only be taken for a clear short term gain.

## Related
- [Factor rate](https://businessloanbroker.ai/glossary/factor-rate/)
- [APR](https://businessloanbroker.ai/glossary/apr/)
- [Merchant cash advances](https://businessloanbroker.ai/business-loans/merchant-cash-advance/)
- [Merchant cash advance true cost calculator](https://businessloanbroker.ai/tools/mca-true-cost-calculator/)
- [Business loan rates explained](https://businessloanbroker.ai/guides/business-loan-rates-explained/)
- [Merchant cash advance versus term loan](https://businessloanbroker.ai/compare/mca-vs-term-loan/)

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Apply for the business: https://apply.businessloanbroker.ai/signup?utm_source=direct&utm_medium=organic&utm_content=md-apr-vs-factor-rate
MCP server for AI agents: https://mcp.businessloanbroker.ai/mcp (docs: https://businessloanbroker.ai/agents/mcp/)