Business lenders use different cost metrics — APR, factor rates, cents on the dollar. Here is how to translate all of them into apples-to-apples comparisons.
APR and factor rates are two completely different ways lenders express the cost of borrowing -- and confusing them can lead to dramatically underestimating what a loan actually costs. Here's a clear explanation of both, with examples to make the math concrete.
What Is APR?
APR (Annual Percentage Rate) expresses the total cost of borrowing as a yearly percentage of the principal. It includes the interest rate plus any fees (origination, servicing, etc.), giving you a standardized way to compare loans.
Example: A $100,000 loan at 12% APR over 3 years costs $18,015 in total interest, with monthly payments of $3,321.
APR is used for: bank loans, SBA loans, lines of credit, equipment financing, and most term loans from online lenders.
What Is a Factor Rate?
Factor rates are used almost exclusively by merchant cash advance (MCA) providers. A factor rate is a simple multiplier applied to the advance amount to determine total repayment.
Example: $50,000 × factor rate of 1.30 = $65,000 total repayment. The $15,000 difference is the cost of the advance, regardless of how long repayment takes.
Why Factor Rates Are Misleading
The critical issue with factor rates: they don't account for time. If you repay that $50,000 advance in 6 months, your effective APR is approximately 60%. If you repay it in 3 months, your effective APR is approximately 120%. Factor rates look small (1.2--1.5 seems manageable) but convert to very high APRs.
How to Convert a Factor Rate to APR
- Calculate total cost: Advance amount × factor rate = total repayment
- Calculate dollar cost: Total repayment - advance amount = cost
- Estimate monthly holdback: Daily holdback × 22 business days
- Estimate months to repay: Advance amount ÷ monthly holdback
- Approximate APR: (Cost ÷ advance amount) ÷ months × 12
Example: $50,000 advance, factor 1.3, 15% daily holdback on $20,000/month revenue ($3,000/month holdback). Repaid in ~16.7 months. APR ≈ (15,000 / 50,000) / 16.7 × 12 = approximately 21.6%. But if revenue increases and you repay in 8 months, APR jumps to ~45%.
APR vs. Factor Rate Comparison Table
| Product | Typical APR Range | Factor Rate (if applicable) |
|---|---|---|
| SBA 7(a) Loan | 7%--11% | N/A |
| Bank Term Loan | 6%--13% | N/A |
| Online Term Loan | 10%--40% | N/A |
| Business Line of Credit | 8%--30% | N/A |
| Merchant Cash Advance | 40%--150%+ | 1.1--1.5 |
Use our business loan calculator to compare APR-based products side by side. Approvd helps you find transparent, competitive financing -- explore your options with no credit impact.
Frequently Asked Questions
Which is better -- low factor rate or low APR?
Always compare APR when possible. A 1.3 factor rate might seem low, but if repaid quickly, it equates to 60%+ APR. APR is a standardized metric that makes comparison straightforward.
Do MCA providers have to disclose APR?
Historically no -- MCAs were structured to avoid lending regulations. Several states including California and New York now require APR-equivalent disclosure. Federal disclosure requirements remain limited for MCAs.
Factor Rate to APR Conversion Table
Use this table to quickly approximate the APR equivalent of common factor rates at different repayment speeds:
| Factor Rate | 3-Month Repayment | 6-Month Repayment | 12-Month Repayment |
|---|---|---|---|
| 1.15 | ~60% APR | ~30% APR | ~15% APR |
| 1.25 | ~100% APR | ~50% APR | ~25% APR |
| 1.35 | ~140% APR | ~70% APR | ~35% APR |
| 1.45 | ~180% APR | ~90% APR | ~45% APR |
| 1.50 | ~200% APR | ~100% APR | ~50% APR |
Why Lenders Use Factor Rates Instead of APR
Factor rates are used by MCA and short-term lenders for a specific reason: they're not required to disclose APR under the Truth in Lending Act (TILA), which applies to consumer loans but has complex applicability to commercial financing. By using factor rates, lenders can present a number (like "1.25") that sounds reasonable without requiring the borrower to calculate the true annual cost.
This isn't illegal — commercial borrowers are presumed to be sophisticated enough to understand financing terms. But it means the burden of understanding the true cost falls entirely on you. The California Commercial Financing Disclosure Law (effective 2022) and similar laws in New York, Utah, and other states now require APR disclosure on commercial financing, but not all states have adopted these rules.
How to Compare Financing Options Using APR
When comparing financing offers, always convert everything to APR for an apples-to-apples comparison. Here's the process:
- For term loans: APR is usually disclosed — use it directly
- For MCAs with factor rates: Calculate total repayment (advance × factor rate), determine the fee amount (total repayment − advance), divide by the advance to get percentage cost, then annualize based on expected repayment term
- For lines of credit: APR is usually disclosed, but factor in any maintenance fees or draw fees for the true all-in cost
- For invoice factoring: Convert the monthly percentage fee to APR (multiply by 12 as an approximation)
Compare financing options with transparent pricing
Approvd presents all financing options with clear APR comparisons — no hidden factor rates. Use our business loan calculator to model costs, or explore SBA financing for the lowest APR products available.
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