A factor rate is the one-time multiplier applied to a merchant cash advance to set the total amount repaid. A $10,000 advance at a 1.35 factor rate repays $13,500. Unlike interest, it does not accrue over time and does not shrink when the advance is paid off early.
The calculation
- Total repayment (RTR) = advance amount × factor rate.
- $25,000 × 1.40 = $35,000 owed back.
- Gross profit to the capital = RTR − advance = $10,000, before fees and defaults.
Factor rate is not APR
APR expresses cost per year; a factor rate is fixed for the life of the advance. Because most advances repay in 3–12 months, the same 1.35 factor rate produces a very different annualized return depending on how quickly the money comes back. A deal that repays in four months returns capital far faster than the same deal stretched over ten.
For an investor, speed of repayment is as important as the factor rate itself, because returned cash can be redeployed into the next deal.
Typical ranges
Factor rates commonly fall between roughly 1.15 and 1.50, driven by the merchant's risk profile, term length and payment frequency. Higher factor rates usually come with higher default risk, so a portfolio's realized return rarely matches its average factor rate.
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