Factor Rate vs APR: The Real Cost of an MCA
A factor rate hides the real cost. Converting it to an APR is the single most useful thing you can do before signing.
Last reviewed: May 26, 2026 by the BizLeaseCheck Editorial Team
General information, not legal advice.
Overview
Funders quote a factor rate because it sounds small: "just 1.49." But a factor rate is not an interest rate — it sets a fixed total payback regardless of time, and the speed of repayment is what makes the true annualized cost enormous.
Converting the factor rate to an estimated APR lets you compare the offer to a bank loan, an SBA loan, or a line of credit on equal terms.
Topics to check
Start with the cost: total payback minus amount funded, divided by amount funded, gives the factor cost (a 1.49 factor on $100,000 is $49,000, or 49%). Then annualize it over the real repayment period. Repaying that $49,000 cost over about 6 months pushes the effective APR well past 100%, because you are paying nearly half the principal in cost in half a year — and you do not get to keep the full $100,000 the whole time, since daily debits shrink the balance immediately.
A precise APR uses the daily payment, the number of payments, and the declining balance; even a rough annualization shows the offer in its true light.
Because daily ACH starts shrinking the outstanding balance immediately, you never have the use of the full advance for the full period. That is why a 49% factor cost collected in months translates into a triple-digit APR — the cost is the same dollars, but spread over far less effective borrowing time.
Fees (origination, ACH, broker) raise the effective APR further, since they reduce the cash you actually receive while you still repay the full factored amount.
Recognizing that factor rates obscure cost, California and New York (and a growing list of states) require providers of commercial financing — including many MCAs — to disclose standardized terms, including an estimated APR, before funding. If your offer comes with a disclosure box, read the APR line; if it does not, estimate it yourself.
These disclosures exist specifically so a small business can compare a factor-rate offer to ordinary financing.
NY DFS — Commercial Financing DisclosureKey takeaways
- A factor rate sets a fixed payback, not an interest rate — convert it to an APR.
- Factor cost = (total payback − amount funded) ÷ amount funded.
- Daily ACH repayment is why a moderate factor cost becomes a triple-digit APR.
- Fees reduce the cash you receive and push the effective APR higher.
- California, New York, and other states now require an estimated-APR disclosure.
Official resources
Legal-review notes
Guide confidence marker: Medium confidence.
- APR math here is illustrative; the exact figure depends on amounts, payment frequency, and payoff timing.
- Which transactions require disclosure, and the disclosure format, vary by state and are evolving.
Frequently asked questions
How do I convert a factor rate to an APR?
First find the factor cost: (total payback − amount funded) ÷ amount funded. Then annualize that cost over the real repayment period, accounting for the declining balance from daily/weekly payments. A 1.49 factor repaid in ~6 months typically works out to a triple-digit effective APR.
Why is the APR so much higher than the factor rate suggests?
Because the total payback is fixed but collected quickly. You repay the full factored amount whether it takes 4 months or 12, and daily debits shrink your balance immediately, so you never have use of the full advance for long. Fees raise it further.
Does my state require an APR disclosure on commercial financing?
A growing number do, including California and New York. If a disclosure box is provided, the estimated APR is the number to compare against other financing. If not, estimate it yourself before signing.