Key takeaways
- A factor rate sets a fixed total payback: 1.30 on $50,000 means $65,000 repaid.
- Because terms are short and payments start right away, the equivalent APR is much higher than the factor suggests.
- Compare total payback, payment frequency, fees and early-payoff terms.
What is a factor rate?
A factor rate is a multiplier that sets the total you will repay. A $50,000 advance at a 1.30 factor rate means you repay $65,000 — $15,000 is the cost of the funding. Factor rates are common for merchant cash advances, revenue-based financing and some short-term working capital.
Unlike interest, the cost is fixed up front. It does not shrink as you pay down the balance, and paying early often does not reduce it unless the agreement includes an early payoff discount.
Why a factor rate looks cheaper than it is
A 1.30 factor rate sounds like 30%, but that cost is spread over a short time — often 6 to 12 months — and you start repaying immediately, usually every business day. Because the average balance you actually hold is much smaller than the original amount, the equivalent annual percentage rate (APR) is far higher than 30%.
For example, $50,000 at a 1.30 factor repaid daily over 9 months works out to an APR of roughly 70% or more. The shorter the term, the higher the equivalent APR.
How to compare offers
- Total payback: the clearest number — how much leaves your account in total
- Payment amount and frequency: daily, weekly or monthly, and whether it fits your cash flow
- Term: shorter terms mean bigger payments and a higher APR for the same factor
- Fees: origination or underwriting fees deducted from the funding raise the real cost
- Early payoff terms: whether paying early saves anything
When a factor-rate product still makes sense
Speed and accessibility have value. If the funding lets you complete a profitable job, buy discounted inventory or avoid a costly disruption, a higher cost can be justified. The key is knowing the true cost and confirming you don't qualify for something cheaper first.
Sources
BFG Funds is not a lender. We connect businesses with independent lenders and funding providers. Amounts, rates, terms and timing are set by each provider after its own review of your business (bank statements, revenue, time in business, credit profile and more) and are not guaranteed.