Why this matters

Factor rates are common on short‑term small‑business loans and merchant cash advances (MCAs). They make total cost easy to see—multiply the principal by the factor rate to get the full amount you must repay—but they don’t tell you the annualized cost (APR). That can make offers look cheaper or pricier than they really are.

Step‑by‑step: converting a factor rate into a monthly payment

  1. Compute total repayment: total = principal × factor rate.
  2. If the loan is an installment product with a fixed term, divide total by months in the term to get a flat monthly payment.

Example 1 — simple installment loan

  • Loan amount: $10,000
  • Factor rate: 1.30
  • Term: 12 months

Total repayment = $10,000 × 1.30 = $13,000
Monthly payment = $13,000 ÷ 12 ≈ $1,083.33

Example 2 — different term

  • Loan amount: $20,000
  • Factor rate: 1.25
  • Term: 15 months

Total repayment = $20,000 × 1.25 = $25,000
Monthly payment = $25,000 ÷ 15 ≈ $1,666.67

Important caveats and special cases

  • Merchant cash advances (MCAs) and revenue‑based financing usually use a holdback or daily/weekly remittance percentage of sales instead of a fixed monthly payment. That means the calendar time to repay can vary with your sales volume and cash flow.
  • The factor rate itself is not an interest rate. To compare with traditional loans, you must annualize the cost (see next section).
  • Fees and origination charges may not be included in the advertised factor rate; ask for a full amortization or payment schedule.

How to approximate an equivalent APR

A quick annualized approximation: approximate APR ≈ (factor rate − 1) ÷ terminyears. This is only a rough estimate but helps compare offers quickly.

  • Example: factor 1.30 on a 12‑month loan → (1.30 − 1) ÷ 1 = 0.30 → ≈30% APR (approximate).
  • Shorter terms sharply increase the implied APR. A factor of 1.20 on a 3‑month term → (0.20) ÷ 0.25 = 0.80 → ≈80% APR.

For an exact APR, use an amortization schedule or an XIRR/XNPV calculator that models the actual payment timing and amounts.

Practical tips I use with clients

  • Ask for a full payment schedule showing each payment date, amount, and remaining principal. If the lender won’t provide one, treat the offer cautiously.
  • Convert the factor rate to an approximate APR to compare with bank loans, lines of credit, or SBA microloans.
  • Consider cash flow: high monthly obligations can strain seasonal businesses—even if the total repayment looks manageable.
  • Shop multiple offers and request written terms; small changes in factor rate or term can materially change monthly payments and annualized cost.

Misconceptions to avoid

  • Don’t assume a lower factor rate always means a cheaper loan—term length and payment frequency matter.
  • Factor rates can hide the real annual cost; always ask how repayment frequency will affect cash flow and total time to repay.

Where to learn more and compare offers

Authoritative sources and who to consult

  • Consumer Financial Protection Bureau (CFPB) — guidance on comparing loan offers and APR disclosure (consumerfinance.gov).
  • U.S. Small Business Administration (SBA) — information on alternative financing and SBA loan options (sba.gov).

In my practice I’ve seen business owners avoid harmful deals by insisting on a written payment schedule and by annualizing the cost before signing.

Professional disclaimer

This article is educational and does not constitute financial or tax advice. For advice tailored to your situation, consult a licensed financial advisor or tax professional.