By Anthony Collin, CEO, Smart Business Funding. $500M+ funded since 2014.
If you are comparing funding offers, you will run into two ways of describing cost: a factor rate and an APR. They measure cost differently, so a number that looks small in one can look large in the other. This guide explains both in plain language, shows the math with a worked example, and gives you a way to compare offers fairly.
The short answer
A factor rate is a simple multiplier that sets the total amount you pay back on a merchant cash advance. An APR (annual percentage rate) is a yearly cost figure used for bank-style products such as term loans and lines of credit. A merchant cash advance is a purchase of future receivables and not a loan, so it is priced with a factor rate and no APR applies. To compare an advance with a loan side by side, you can convert the factor rate into an APR equivalent, as long as you account for the repayment term.
What a factor rate is
A factor rate is a fixed number, usually between 1.2 and 1.5, that you multiply by the funding amount to get your total payback. It is set once, up front, and does not change.
- Funding amount: $50,000
- Factor rate: 1.35
- Total payback: $50,000 x 1.35 = $67,500
- Cost of funding: $67,500 minus $50,000 = $17,500
Our in-house Direct Fund program uses factor rates of 1.25 to 1.49 for prime files and 1.309 to 1.499 for higher-risk files, with fees of 5% to 10%. You can see the exact structure on our Transparent Terms page.
What an APR is
An APR expresses the cost of borrowed money as a yearly percentage, so it depends on both the price and how long you keep the money. Because it is annualized, the same dollar cost produces a very different APR when the repayment period is short. That is why a factor rate and an APR cannot be compared directly without knowing the term.
Why the same factor rate can mean very different APR equivalents
Take the same $50,000 and the same 1.35 factor rate, and change only the repayment term. The total payback stays at $67,500 every time, but the annualized equivalent changes a lot:
| Term | Daily payment | Total payback | APR equivalent |
|---|---|---|---|
| 6 months | $535.71 | $67,500 | about 126% |
| 10 months | $321.43 | $67,500 | about 76% |
| 15 months | $214.29 | $67,500 | about 51% |
These figures assume about 21 business days of fixed daily payments per month and no fees. The takeaway: when comparing offers, look at the total dollars you repay and the payment that fits your cash flow, and use the APR equivalent only as a rough yardstick.
Comparing an advance with a bank term loan
A $50,000 bank term loan at 12% APR over 12 months has a monthly payment of about $4,442 and costs about $3,309 in total interest. It is cheaper in dollars, but it usually requires strong credit, longer paperwork and collateral, and it may take weeks to fund. A merchant cash advance costs more, but it is built for businesses that need speed or do not qualify for bank products. Neither is right for everyone. Read our guide on the difference between a term loan and a merchant cash advance for the full comparison.
How to compare offers fairly
- Ask for the total payback in dollars. This is the number that never hides anything.
- Get the payment schedule. Is it daily or weekly, and how many payments?
- Add the fees. Fees are usually deducted from the funds you receive, so they raise your real cost.
- Check the term. A shorter term means a higher APR equivalent for the same factor rate.
- Look at what you actually receive. Divide your total payback by the funds that reach your account.
Try it yourself
Enter your own numbers into our merchant cash advance cost calculator to see total payback, daily payment and an APR equivalent for any offer you are considering, including offers from other funders.
Frequently asked questions
Is a factor rate the same as an interest rate?
No. A factor rate is a one-time multiplier that sets your total payback. It does not compound or change over time.
Does paying early lower my cost?
That depends on your agreement. Ask whether any early payoff discount applies before you sign, and have it written down.
Why do advances show a high APR equivalent?
Because they repay quickly. The same dollar cost spread over a few months converts to a larger yearly percentage than when it is spread over several years.
Will applying affect my credit score?
No. We use a soft credit pull only, and our minimum credit score is 500.
Ready to see an offer? Apply now. Offers usually arrive in 1 to 5 hours on a complete file, and funding is usually 24 to 48 hours from application. All funding is subject to underwriting, approval and applicable terms. This article is general information and is not legal, tax or financial advice.
