Factor rate to APR calculator: what a cash advance really costs
Convert a merchant cash advance factor rate, or an invoice-factoring fee, into an annual rate. Payments, fees and term are included in an IRR-based estimate.
Short-term business financing is often priced with a factor rate (for example 1.25) instead of an interest rate. Because repayment starts almost immediately, the yearly cost is much higher than the factor suggests.
Your assumptions
Factor 1.25: you repay USD 25,000 in 130 payments of USD 192.31. Total cost USD 5,500 on USD 19,500 received.
How the calculation works
Payback = amount × factor; payment = payback / number of payments; solve (amount − fees) = Σ payment / (1 + i)^t; APR = i × payments per year; factoring: (1 + fee / advance)^(365 / days) − 1The cash-advance mode treats the money received after fees as the starting cash flow and each daily or weekly payment as an outflow. The periodic rate i is the internal rate of return. The invoice-factoring mode compares the fee with the money advanced and annualises it over the days until your customer pays.
Step by step
- Factor rate = total payback ÷ advance amount. If you enter the total payback, the factor is derived from it.
- Number of payments = weeks × 5 for business-day payments, or weeks for weekly payments.
- Money received = advance − upfront fees. Total cost = payback − money received.
- Periodic IRR i solves money received = Σ payment ÷ (1 + i)^t. Nominal APR = i × 260 (daily) or × 52 (weekly); effective annual rate = (1 + i)^periods − 1.
- The naive rate (total cost ÷ money received ÷ years) is shown to explain why it understates the cost: you do not keep the full amount for the whole term.
- Invoice factoring: advance = invoice × advance %; fee = invoice × fee % × started 30-day periods; annualised cost = (1 + fee ÷ advance)^(365 ÷ days) − 1.
Limitations
Many cash advances are repaid as a share of card sales, so the term and payments vary; enter your best estimate of the term. Fees can be charged differently (per day, on the advance, with minimums). Disclosure rules for commercial financing differ by country and state. Default values are invented examples. Illustration, not advice or an offer.
Questions, answered.
Is a factor rate of 1.25 the same as 25% interest?
No. 25% is the total cost relative to the advance over the whole term. Because you repay from the start, the annual rate is usually far higher.
Why are there two annual rates?
Nominal APR multiplies the periodic rate by the number of periods per year; the effective rate compounds it. Both start from the same IRR.
What if I repay early?
Many factor-rate agreements charge the full payback even if you repay early. Then a shorter term raises the annual rate further. Check the agreement.
Embed this calculator
Use this responsive embed on your website. Keep the source link so readers can inspect the formula.
<iframe src="https://mymoneynotebook.com/embed/factor-rate-apr/" title="Factor rate to APR calculator: what a cash advance really costs" width="100%" height="1600" style="border:0" loading="lazy"></iframe>
<a href="https://mymoneynotebook.com/calculators/factor-rate-apr/">Factor rate to APR calculator: what a cash advance really costs</a>