MCA field guide
Factor rate versus APR
Why a factor rate describes total payback while APR measures an annualized borrowing cost—and why the two should not be casually substituted.
Quick answer
A factor rate multiplies the funded amount to show total contractual payback. APR annualizes financing cost and incorporates time. They answer different questions and should not be presented as interchangeable.
Factor rate answers a different question
Multiply the funded amount by the factor rate to calculate contractual payback. A $100,000 advance at a 1.30 factor produces $130,000 in total payback before any separately disclosed fees. The factor does not include time by itself.
Payment speed changes effective cost
Two offers can share a 1.30 factor and have very different cash-flow effects when one remits over six months and the other over twelve. Renewal timing, reconciliation language, fees, and the actual repayment path can also change the economic result.
Compare complete offers
Record funded amount, net proceeds, total payback, frequency, estimated payment, expected term, fees, prepayment terms, and reconciliation rights. Use the comparison tool for arithmetic, then review the agreement and applicable disclosures for the legal terms.
Practical checklist
- Record gross funded amount and net proceeds separately.
- Calculate total payback from the agreement—not from an advertisement.
- List every origination, broker, wire, and closing fee.
- Compare expected term and payment frequency.
- Review reconciliation and prepayment language.
- Use required commercial-financing disclosures where applicable.
Common questions
Can I convert any factor rate directly into APR?
Not responsibly without timing, fees, payment schedule, and the product’s actual legal structure.
Is a lower factor always the better offer?
No. A shorter term or larger periodic payment may create a harder cash-flow burden.
What should I compare first?
Net proceeds, total payback, payment amount and frequency, expected term, fees, prepayment treatment, and reconciliation rights.
Primary sources and context
- Consumer Financial Protection Bureau — Small business lending rule FAQsOfficial federal context for merchant cash advances and sales-based financing.
- California DFPI — Commercial financing disclosuresOfficial disclosure framework covering amount, cost, term, payments, and prepayment policy.
Methodology and corrections
This guide distinguishes calculations, common industry practice, and lender-specific policy. Criteria should be confirmed from the dated source on each lender profile. Report an error through the correction policy.