Understanding MCA Factor Rates
Factor rates are the primary way Merchant Cash Advances express their cost. Unlike interest rates you're familiar with from traditional loans, factor rates work differently—and understanding them is crucial to knowing what you're really paying.
What Is a Factor Rate?
Simple Definition
A factor rate is a decimal number (like 1.25 or 1.40) that, when multiplied by your advance amount, tells you exactly how much you'll repay in total.
The Formula:
Advance Amount × Factor Rate = Total Repayment
Example Calculation
| Component | Value |
|---|---|
| Advance Amount | $50,000 |
| Factor Rate | 1.35 |
| Total Repayment | $50,000 × 1.35 = $67,500 |
| Cost of Capital | $17,500 |
Unlike interest that accrues over time, the factor rate locks in your total cost from day one.
Factor Rate vs. Interest Rate
Fundamental Differences
| Aspect | Factor Rate | Interest Rate (APR) |
|---|---|---|
| How It's Expressed | Decimal (1.25) | Percentage (25%) |
| When Cost Is Set | At origination | Accrues daily/monthly |
| Early Payoff | No benefit | Saves money |
| Easy to Calculate | Yes | Requires amortization |
| Standardized | No | Yes (regulated) |
Why the Difference Matters
Interest Rate Example (Traditional Loan):
- ●Borrow: $50,000
- ●Rate: 15% APR
- ●Term: 12 months
- ●If repaid in 6 months: Pay ~$4,000 interest
- ●If repaid in 12 months: Pay ~$8,000 interest
Factor Rate Example (MCA):
- ●Advance: $50,000
- ●Factor: 1.35
- ●If repaid in 6 months: Pay $67,500 ($17,500 cost)
- ●If repaid in 12 months: Pay $67,500 ($17,500 cost)
The factor rate cost doesn't change based on how quickly you repay.
Factor Rate Ranges by Risk Profile
Typical Factor Rates
| Risk Profile | Factor Rate Range | Cost per $10,000 |
|---|---|---|
| Excellent | 1.10 - 1.20 | $1,000 - $2,000 |
| Good | 1.20 - 1.30 | $2,000 - $3,000 |
| Fair | 1.30 - 1.40 | $3,000 - $4,000 |
| Challenged | 1.40 - 1.50 | $4,000 - $5,000 |
| High Risk | 1.50+ | $5,000+ |
What Determines Your Factor Rate
| Factor | Better Rate | Worse Rate |
|---|---|---|
| Time in Business | 2+ years | Under 1 year |
| Monthly Revenue | High, consistent | Low, variable |
| Industry | Low-risk sectors | High-risk sectors |
| Personal Credit | 650+ | Under 600 |
| Prior Funding History | Successfully repaid | First-time or issues |
| Bank Statement Quality | Clean, no NSFs | NSFs, low balances |
Converting Factor Rate to APR
Why Convert?
Converting helps you compare MCAs to traditional loans on an apples-to-apples basis.
Conversion Formula
Basic Approximation:
Equivalent APR ≈ ((Factor Rate - 1) ÷ Term in Years) × 100
Conversion Table
| Factor Rate | 6-Month Term | 9-Month Term | 12-Month Term |
|---|---|---|---|
| 1.15 | ~30% APR | ~20% APR | ~15% APR |
| 1.20 | ~40% APR | ~27% APR | ~20% APR |
| 1.25 | ~50% APR | ~33% APR | ~25% APR |
| 1.30 | ~60% APR | ~40% APR | ~30% APR |
| 1.35 | ~70% APR | ~47% APR | ~35% APR |
| 1.40 | ~80% APR | ~53% APR | ~40% APR |
| 1.50 | ~100% APR | ~67% APR | ~50% APR |
Important: These are approximations. Actual effective APR depends on payment frequency and structure.
More Accurate Formula
For daily payment MCAs:
APR ≈ ((Factor Rate - 1) × 365) ÷ (Days × (1 + Factor Rate) / 2) × 100
The True Cost of Factor Rates
Cost Comparison: $50,000 Funding
| Option | Structure | Total Cost | Effective APR |
|---|---|---|---|
| Bank Term Loan | 10% APR, 3 years | ~$8,000 | 10% |
| Online Term | 25% APR, 18 months | ~$10,000 | 25% |
| MCA (10-month) | 1.30 factor | $15,000 | ~36% |
| MCA (8-month) | 1.35 factor | $17,500 | ~53% |
| MCA (6-month) | 1.40 factor | $20,000 | ~80% |
Why MCAs Cost More
Several factors drive higher MCA costs:
| Factor | Explanation |
|---|---|
| Speed | 24-72 hour funding commands premium |
| Risk | No collateral, higher default rates |
| Accessibility | Serves borrowers banks reject |
| Collection Risk | Daily payment structure requires management |
| Regulation | Less regulated, market-driven pricing |
Factor Rate Red Flags
Warning Signs
| Red Flag | What It Means |
|---|---|
| Factor above 1.50 | Extremely expensive, consider alternatives |
| Undisclosed factor | Lack of transparency |
| Factor + fees | True cost higher than stated |
| Extremely low factor | May have hidden catches |
| No factor disclosed | Request in writing before signing |
Questions to Ask
- ●"What is my exact factor rate?"
- ●"What is my total repayment amount?"
- ●"Are there any additional fees not included in the factor?"
- ●"What is the estimated repayment term?"
- ●"Is there any payoff discount?"
Negotiating Better Factor Rates
Factors That Give You Leverage
| Leverage Point | Potential Improvement |
|---|---|
| Strong bank statements | 0.05 - 0.15 reduction |
| Multiple competing offers | 0.03 - 0.10 reduction |
| Prior successful funding | 0.05 - 0.15 reduction |
| Higher advance amount | 0.02 - 0.05 reduction |
| Industry stability | 0.02 - 0.08 reduction |
Negotiation Tips
- ●Get multiple offers: Apply to 3-5 lenders
- ●Share competing offers: Use them as leverage
- ●Highlight strengths: Point out positive metrics
- ●Ask directly: "Can you improve the factor rate?"
- ●Consider timing: End of month/quarter may help
Factor Rate Components
What's Included in the Factor Rate
Typically, the factor rate covers:
- ●Cost of capital
- ●Underwriting costs
- ●Servicing costs
- ●Risk premium
- ●Profit margin
What May NOT Be Included
Watch for additional fees:
| Additional Fee | Typical Amount |
|---|---|
| Origination Fee | 1-3% of advance |
| Wire Fee | $20-50 |
| Admin Fee | $150-500 |
| UCC Filing Fee | $75-150 |
| Due Diligence Fee | $100-300 |
Example: True Cost Calculation
- ●Advance: $50,000
- ●Factor Rate: 1.30 (quoted)
- ●Origination: 2% ($1,000)
- ●Admin Fee: $250
- ●True Total: $65,000 + $1,250 = $66,250
- ●True Factor: 1.325
Making Factor Rates Work for You
When Factor Rates Are Acceptable
High factor rates can make sense when:
| Scenario | Justification |
|---|---|
| Urgent opportunity | ROI exceeds funding cost |
| No other options | Credit issues limit alternatives |
| Short-term bridge | Temporary need until better options |
| Seasonal surge | Revenue will cover cost quickly |
When to Avoid
Factor rates are problematic when:
| Scenario | Risk |
|---|---|
| Long-term financing need | Better options exist |
| Low-margin business | Can't absorb cost |
| Already have MCAs | Stacking increases risk |
| Unclear ROI | May not generate returns |
Factor Rate Calculator
Quick Reference Table
For $25,000 Advance:
| Factor Rate | Total Repayment | Cost |
|---|---|---|
| 1.15 | $28,750 | $3,750 |
| 1.25 | $31,250 | $6,250 |
| 1.35 | $33,750 | $8,750 |
| 1.45 | $36,250 | $11,250 |
For $75,000 Advance:
| Factor Rate | Total Repayment | Cost |
|---|---|---|
| 1.15 | $86,250 | $11,250 |
| 1.25 | $93,750 | $18,750 |
| 1.35 | $101,250 | $26,250 |
| 1.45 | $108,750 | $33,750 |
For $100,000 Advance:
| Factor Rate | Total Repayment | Cost |
|---|---|---|
| 1.15 | $115,000 | $15,000 |
| 1.25 | $125,000 | $25,000 |
| 1.35 | $135,000 | $35,000 |
| 1.45 | $145,000 | $45,000 |
Summary: Key Takeaways
Understanding Factor Rates
- ●Simple calculation: Advance × Factor = Total Repayment
- ●Fixed cost: Doesn't decrease with early payoff
- ●Higher than APR equivalents: Due to speed and accessibility
- ●Varies by risk: Better profile = lower factor
Best Practices
- ●Always calculate total dollars: Know exact cost
- ●Convert to APR: For comparison purposes
- ●Check for additional fees: Factor may not include everything
- ●Shop around: Factor rates are negotiable
- ●Understand the tradeoff: Speed and access vs. cost
Factor rates are simply a different way of expressing cost. They're not inherently good or bad—the key is understanding exactly what you're paying and whether the cost is justified for your specific situation.