Capital & Financing
APR vs Factor Rate: What's the Difference?
Factor rate is the multiple of an advance you repay, so a 1.30 factor means $1.30 back per $1 borrowed regardless of speed, while APR annualizes that cost. The same 1.30 factor is about 30 percent APR over 12 months, 60 percent over 6 months, and 120 percent over 3 months, because faster payback compresses the cost into less time. Providers quote factor rate because it sounds smaller and dodges usury caps, so always translate to APR before comparing capital options.
Annual Percentage Rate (APR) is the annualized cost of capital. Factor rate is the multiple of the advance you repay. They measure different things, and the gap between them is exactly where merchants get misled into expensive capital decisions.
The math
Factor rate is a static multiple. Factor 1.30 means $1.30 repaid per $1 borrowed, regardless of payback speed.
APR translates that into an annualized rate. Approximate formula: APR roughly equals (factor minus 1) divided by the payback period in years.
Same factor, different APRs
- Factor 1.30, paid back in 12 months: APR is about 30 percent
- Factor 1.30, paid back in 6 months: APR is about 60 percent
- Factor 1.30, paid back in 3 months: APR is about 120 percent
The faster you pay it back, the higher the APR. Counter-intuitive but correct: the same dollar cost gets compressed into less time, so the annualized rate spikes. Use our True Interest Cost calculator for the exact translation.
Why providers prefer factor rate
- It sounds smaller (1.30 vs 60 percent APR)
- It's not legally an interest rate, so it avoids usury caps
- It obscures the time-adjusted real cost from buyers
The most common mistake
Comparing a "1.30 factor" offer to a "12 percent APR" line of credit and assuming they're similar. They're not. Factor 1.30 is usually 60 to 120 percent APR. Always translate to APR before comparing capital options side by side.
Browse the full ecommerce finance glossary for every metric and money term a DTC operator needs.
Frequently Asked Questions
why do mca providers quote factor rate instead of apr?
Factor rate sounds smaller and isn't legally an interest rate, so it dodges usury caps. Always translate to APR before signing.
how do i actually convert factor rate to apr?
Approximate formula: APR roughly equals (factor minus 1) divided by payback period in years. Factor 1.30 over 6 months is about 60 percent APR. Same factor over 3 months is about 120 percent APR.
is the real apr always higher than the factor rate suggests?
Basically always. If a provider quotes only factor rate, they're hiding the real cost on purpose.