What is a factor rate?
A factor rate is a decimal, often between about 1.1 and 1.5, that you multiply by the amount funded to get the total repayment. It is common with merchant cash advances and some short-term business funding. The cost is set at the start, and it usually does not shrink if you repay faster.
Illustrative example only: $40,000 funded at a 1.25 factor means $50,000 total repayment, so the cost is $10,000. That $10,000 is owed whether repayment takes five months or eight, unless the agreement specifically offers a prepayment discount.
How does an interest rate work?
An interest rate is charged on the outstanding balance over time, usually stated as an annual percentage. As you make payments, the balance falls and so does the interest on it. Repaying early typically reduces the total interest, unless the loan has a prepayment penalty. APR also folds in certain fees.
That is why the same percentage means very different things. A 25% factor cost is charged on the full original amount for the whole term. A 25% annual interest rate is charged only on what you still owe, only for as long as you owe it.
| Factor rate 1.25 | 25% annual interest | |
|---|---|---|
| How cost is calculated | Once, on the full amount | Over time, on the remaining balance |
| Total repayment | $50,000 | About $42,900 |
| Dollar cost | $10,000 | About $2,900 |
| Repay early | Often no savings unless offered | Usually less interest |
Why does a factor rate look cheaper than it is?
Two reasons: term and declining balance. A factor cost is fixed even though you repay steadily, so on average you have only about half the money for the period while paying cost on all of it. And when the term is shorter than a year, the annualized equivalent climbs sharply.
Illustrative example only: borrowing $40,000 for six months at 25% annual interest with equal monthly payments costs roughly $2,900 in interest. The same $40,000 at a 1.25 factor costs $10,000. Both involve the number 25, but the factor-rate offer costs more than three times as much in dollars over the same six months.
How does the term change the comparison?
The shorter the repayment period, the higher the annualized cost of a fixed factor cost. A 1.25 factor repaid over twelve months is expensive; the same factor repaid over four months is far more expensive on an annual basis. If sales-based payments speed up in a strong month, the effective annual cost rises too.
This is why many state commercial financing disclosure rules ask for an estimated annualized figure on covered offers. See our disclosure laws overview. For a full side-by-side process, read how to compare funding offers.
When can a factor-rate product still make sense?
When speed or flexibility is worth the premium and the use of funds earns more than the cost. Examples include buying discounted inventory that sells quickly, covering an urgent repair that keeps revenue flowing, or bridging a short gap when cheaper options are not available in time. It rarely makes sense for long-term investments.
Before accepting, confirm three things: the dollar cost is smaller than what the funds will earn or save, the payment fits your slowest month, and you are not stacking it on top of other daily or weekly payments. Compare with a line of credit or term loan if you have time to wait.
What should you ask before signing?
Ask for the total repayment, net amount received, payment amount and frequency, estimated term, any estimated annualized cost, all fees, and whether early repayment reduces the total. For sales-based products, also ask how payments adjust if revenue falls. Get every answer in the written agreement, not only in conversation.
Our page on revenue-based financing explains holdbacks and reconciliation, and How It Works shows what you review when you apply with 50 States Funding.
Frequently asked questions
How do I convert a factor rate to an APR?
An exact conversion depends on the payment schedule and actual repayment speed, which can change with sales-based products. Where a state requires an estimated annualized rate in the disclosure, use that figure. Otherwise, ask the provider for an estimate and compare it with the total dollar cost.
Is a lower factor rate always better?
Not necessarily. A lower factor with a much shorter term can have a higher annualized cost than a slightly higher factor over a longer term, and fees can shift the math. Compare net amount received, total repayment, term and payment together.
Do factor rates apply only to merchant cash advances?
They are most common with merchant cash advances and revenue-based products, but some short-term loans also quote costs this way. Whatever the label, you can convert the offer into total repayment and dollar cost to compare it.
Why do funders use factor rates?
Many sales-based products are structured so repayment depends on revenue, which makes a fixed interest rate awkward to apply. A factor rate sets a fixed total up front. It is simple to state, but it hides the effect of term, so compare carefully.
Know the real cost before you sign
Apply once and compare offers with totals in writing.
Updated September 14, 2026 · 50 States Funding Team