Factor rate vs APR: what a business cash advance really costs per year

A factor rate is not an interest rate. It only tells you how much you pay back in total: an advance of 10,000 at a factor rate of 1.3 means 13,000 to repay. To know what that costs per year, you need the repayment schedule. Repaid in equal weekly payments over six months, that example works out at an APR of about 107%. Over three months, about 207%. The 3,000 cost never changes; the time does.

All examples on this page use hypothetical currency units, so they work in any currency. Example rates and fees are teaching assumptions, not offers from any provider, and this page is general education, not financial, legal or credit advice. Rules on business finance differ by country, and in the US by state.

What a factor rate is

A merchant cash advance (MCA), sometimes marketed as revenue-based financing or sales-based financing, gives a business an upfront sum that it repays from future sales. The UK’s state-owned British Business Bank describes the typical structure: the provider pays a lump sum, and the business repays it through a percentage of its card sales plus fees, deducted daily, weekly or monthly. It gives “around 10% of each card sale” as a typical deduction and says repayment periods “typically range from three to 18 months”. British Business Bank MCA guide.

The price is expressed as a factor rate, a decimal such as 1.2, 1.3 or 1.4:

Total payback = amount advanced × factor rate

Cost = total payback − amount you actually receive

With 10,000 and a factor rate of 1.3, the payback is 13,000 and the cost is 3,000. That looks like “30%”, and that is where many comparisons go wrong. Thirty percent of what, over how long? A factor rate contains no time.

How to convert a factor rate to an APR

An APR (annual percentage rate) expresses the cost per year, including the effect of when each payment is made. The standard method used for US consumer and some commercial disclosures (the actuarial method in Regulation Z) finds the periodic rate that makes all payments, discounted back, equal the amount you received, then multiplies it by the number of periods in a year.

Worked example (EXAMPLE, own calculation):

• You receive: 10,000 units
• Factor rate: 1.3 → total payback 13,000
• Repayment: 26 equal weekly payments of 500 (six months)
• Solve for the weekly rate r in: 10,000 = Σ 500 ÷ (1 + r)^k, k = 1…26 → r ≈ 2.05% per week
• APR = r × 52 ≈ 107%

Compounded weekly, the effective annual rate would be about 187%. Whichever measure you use, use the same one for every offer.

Why the number is so high: the average balance

On day one you have all 10,000. From week one, you are paying it back. Averaged over the six months, you only had about 5,000 in use, and you paid 3,000 for it. That gives a quick rule of thumb:

APR ≈ cost ÷ average amount in use ÷ years

3,000 ÷ 5,000 ÷ 0.5 ≈ 120%. The rule slightly overstates the exact result (107%), but it shows the scale in seconds and stops “30%” from sticking in your head.

Same cost, different time

Keep the advance, the factor rate and the 3,000 cost the same and change only the repayment period (EXAMPLE, weekly payments, own calculation):

With daily debits on business days over six months (126 payments), the result is similar: about 109%.

Two things that push the APR higher

Faster repayment. With a sales-based advance, a strong month means bigger deductions and an earlier payoff. If the contract fixes the total payback, paying faster does not lower the cost; it raises the APR. Check whether the contract offers any discount for early repayment.

Fees taken off the top. If 500 of the 10,000 is kept as a fee and you receive 9,500 while still owing 13,000 over six months, the APR rises to about 129% (EXAMPLE). In a 2022 case, the US Federal Trade Commission alleged that a cash advance provider’s customers often received thousands of dollars less than promised because of fees that were not disclosed. FTC press release.

The factor rate to APR calculator runs this calculation for your own numbers. The broader principle, that rate, fees and time belong together, is covered in borrowing costs, and the difference between per-year measures in APY vs. APR.

Why many offers don’t show an APR

A merchant cash advance is often written as a purchase of future sales rather than as a loan, and business finance is regulated differently from consumer credit. Whether an APR must be disclosed depends on where you are:

• European Union: the consumer credit directive protects consumers, defined as natural persons acting “for purposes which are outside his or her trade, business or profession”. Directive (EU) 2023/2225, Art. 3. National rules for business lending vary and were not reviewed here country by country.
• United Kingdom: the FCA’s remit covers business lending of £25,000 or less to sole traders and small partnerships; lending to limited companies and business lending above £25,000 fall outside it. FCA, 17 September 2026.
• California (US): commercial financing offers under $500,000 must disclose the total cost as an annualised rate; the regulations, which cover sales-based financing and factoring, took effect on December 9, 2022, and a 2023 law (SB 33) removed the sunset on the annualised-rate requirement. SB 33, DFPI.
• New York (US): the commercial finance disclosure rules apply to financing of $2.5 million or less, with disclosures required since August 1, 2023. Mayer Brown summary. For sales-based financing the law requires an estimated APR calculated under Regulation Z, based on the estimated term and projected payments. NY Financial Services Law § 803.

Where no such rule applies to you, do the conversion yourself before comparing offers.

When it goes wrong: two documented cases

Most expensive financing is simply expensive. But regulators have documented cases that went much further. These are allegations and settlement terms, not findings about the industry as a whole.

• New York Attorney General v. Yellowstone Capital (US). The March 2024 lawsuit alleged that contracts described as purchases of future revenue in reality collected fixed daily amounts over short terms such as 60 or 90 days, at interest rates “of up to 820% per year”, and that the companies used confessions of judgment to obtain court judgments and take money from bank accounts. NY AG, March 2024. The January 2025 settlement included a $1.065 billion judgment and the cancellation of more than $534 million in debts for over 18,000 small businesses. NY AG, January 2025.
• FTC v. RCG Advances / Richmond Capital (US). The FTC alleged that the company’s websites claimed no personal guarantee was required while its contracts included one. The 2022 order banned the company and its owner from the merchant cash advance industry and required more than $2.7 million to be returned. FTC.

Personal guarantees: the hidden collateral

“No collateral” means no specific asset is pledged. It does not mean nobody is personally liable. With a personal guarantee, the owner or director pays from their own money if the business cannot.

• United States: for the SBA’s main 7(a) loan programme, owners of 20% or more of the business are generally required to give a personal guarantee (SBA standard operating procedure; check the current version with your lender).
• United Kingdom: the Federation of Small Businesses filed a super-complaint about personal guarantees in December 2023. The FCA’s March 2024 response notes that directors and others guaranteeing limited company borrowing do not benefit from its consumer credit protections. FCA response.

Before signing anything, ask: if this goes wrong, what can be taken, and from whom?

Working capital options compared

The same need, about 10,000 units for about six months, can be met in different ways. These are categories, not recommendations; availability and pricing depend on your business, your credit history and your country.

Credit line (EXAMPLE). Borrowing 10,000 at an assumed 12% APR, repaid in equal weekly payments over 26 weeks, costs about 315 units in interest before any fees, compared with 3,000 for the factor-rate example. The 12% is an assumption for illustration, not a market rate.

Invoice finance. According to the British Business Bank, factoring can advance up to 90% of invoice value; with factoring the provider manages collection from your customers, while invoice discounting is finance-only and you keep collecting. Costs usually combine a service fee and a discount charge on the funds you use. British Business Bank, invoice finance. Recourse matters: with recourse factoring, the risk of your customer not paying comes back to you; without recourse (in Germany echtes Factoring), the factor carries the default risk within agreed limits. Deutscher Factoring-Verband.

Annualising an invoice fee (EXAMPLE). Invoice 10,000, advance 8,500 (85%), total fees 250. If your customer pays after 60 days: 250 ÷ 8,500 × 365 ÷ 60 ≈ 18% a year. If the same flat fee applies and the customer pays after 30 days: ≈ 36% a year. Short time plus fixed fee means a higher annual cost, the same effect as with a factor rate.

Public guarantee schemes and free help

Many countries run programmes that make lenders more willing to lend to small businesses. A few examples:

• United States: the SBA guarantees loans made through participating lenders. SBA loans
• United Kingdom: under the Growth Guarantee Scheme, delivered through the British Business Bank, the government guarantees 70% of the facility to the lender; the borrower remains responsible for the full debt, personal guarantees can be taken at the lender’s discretion, and a principal private residence cannot be taken as security under the scheme. Growth Guarantee Scheme
• Germany: regional guarantee banks (Bürgschaftsbanken) typically cover up to 80% of the default risk of a loan for the lending bank; applications usually go through your house bank. VDB FAQ
• Elsewhere: look for your national development bank, state guarantee fund or chamber of commerce.

If a cash advance is already straining your cash flow, free advice exists. In the UK, Business Debtline, run by the Money Advice Trust charity, offers free debt advice to the self-employed and small businesses. In the US, Small Business Development Centers offer free business consulting. Asking early usually keeps more options open. A clear cash-flow picture helps any adviser or lender understand the gap you are trying to bridge.

How to compare offers where you live

1. Write down four numbers for every offer: the amount that actually lands in your account, the total payback, the payment amount and frequency, and the estimated term.
2. Convert each offer to an APR with the same method, or use the factor rate to APR calculator. For sales-based offers, run a slow-sales and a fast-sales scenario.
3. Check the local disclosure rules. In California and New York, covered providers must show an annualised rate or estimated APR. In the UK, check whether your agreement falls within the FCA’s regulated perimeter (sole trader or small partnership, £25,000 or less). In the EU, consumer credit rules generally do not cover business borrowing.
4. Check who the provider is. Use your country’s official registers where they exist, for example the FCA Financial Services Register in the UK or a state licensing regulator in the US. Depending on the product and the borrower, a provider may not need to be registered at all.
5. Read the guarantee, security and default clauses, including any confession-of-judgment or direct-debit authority.
6. Ask about public schemes through your bank or national development bank before accepting the fastest offer.

Common mistakes

• Reading the factor rate as an annual rate. 1.3 is not 30% a year; in our example it is about 107%.
• Comparing payment size instead of total cost and time. A small daily debit can still be a very expensive product.
• Ignoring deducted fees. Calculate on the amount you receive, not the headline amount.
• Assuming early repayment saves money. With a fixed payback, it often does not; check the contract.
• Overlooking personal liability. “Unsecured” and “no collateral” can still include a personal guarantee.

Questions people ask

Is a factor rate the same as an interest rate?

No. A factor rate is a multiplier on the amount advanced that sets the total payback. An interest rate or APR expresses cost per year. You need the repayment schedule to convert one into the other.

Are merchant cash advances loans?

They are often structured as purchases of future receivables rather than loans, which affects which rules apply. In New York, the Attorney General alleged that some contracts labelled as purchases functioned as loans. How a contract is treated depends on its terms and on local law.

Is invoice factoring cheaper than a merchant cash advance?

Not automatically. Compare both on the same annual basis, including all fees and the time until your customer pays. In our examples, a 250-unit fee on an 8,500 advance for 60 days is about 18% a year, while the factor-rate example is about 107%.

What can I do if I already have an expensive advance?

Get free advice early (see above), list all repayments against your expected cash flow, read the contract’s default and early-repayment terms, and talk to your bank about alternatives before taking another advance.