Factor Rate

Updated on:
August 3, 2023

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If you’re looking for a merchant cash advance, you must know how a factor rate works. It’s not like the interest that builds on a typical small business loan.

What is a Factor Rate?

Factor rates are commonly used in the context of merchant cash advances (MCAs) as a way to determine the total cost of funding for small business owners. Instead of an annual percentage rate (APR) found in traditional business loans or lines of credit, a factor rate is a decimal figure representing the cost of business funding for short-term financing options like MCAs.

This rate is applied to the advance amount and considers the merchant’s historical revenue performance and sales trends, cash flow, as well as the length of the repayment period. The total repayment amount is calculated by multiplying the purchase price by the factor rate.

While factor rates sometimes result in slightly higher costs than annualized interest rates, many businesses prefer the straight forward way for businesses to understand the total cost associated with an MCA, allowing them to make informed decisions about their financing needs.

How do Factor Rates Affect My Small Business?

A factor rate can affect a small business by influencing the overall cost of funding and the repayment terms associated with a merchant cash advance (MCA). Since factor rates are typically used for short-term financing, they can impact a business’s cash flow.

Sometimes, a small business might consider exploring SBA loans or other alternatives that offer slightly lower interest rates or different repayment terms. But many often find that qualifying for an SBA is extremely challenging, very labor intensive with sometimes hundreds of pages of files to submit or read, and takes a considerably longer length of time.

Examples of using “Factor Rate”

  • “The factor rate on my merchant cash advance is already defined so I know exactly how much the MCA will cost in the end.”

  • “My monthly revenue has been so strong this year that the factor rate on my MCA is only 1.1.”

  • “Business financing with a factor rate is so simple. I never have to worry about the amount of interest being added to my remaining balance every month.”

Related Terms

  • Merchant Cash Advance

  • Interest Rate

  • Annual Percentage Rate

  • Origination Fees

  • Holdback

Check out the rest of LCF’s Small Business Glossary Here
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