Factor Rate to APR Calculator
Compare the true cost of business funding
Factor Rate vs. APR: Understanding the Difference
In the world of alternative business lending and Merchant Cash Advances (MCA), lenders frequently use Factor Rates instead of traditional interest rates. While a factor rate of 1.2 might sound lower than a 20% APR, they are fundamentally different calculations.
What is a Factor Rate?
A factor rate is a fixed multiplier applied to your principal. It does not account for a declining balance. If you borrow $10,000 at a 1.2 factor rate, you will owe $12,000 regardless of how quickly you pay it back. The interest is "pre-computed" on the original amount.
Why APR Matters
Annual Percentage Rate (APR) includes both interest and fees, spread over a one-year period. Because factor-rate loans often have short terms (3 to 12 months) and daily or weekly payments, the effective APR is usually much higher than the factor rate suggests.
How to Convert Factor Rate to APR
To manually calculate the approximate APR for a factor rate loan, you can use this formula:
Calculation Example
Imagine you take a $100,000 advance with a 1.15 factor rate and a 6-month (182 days) term, with a $2,000 origination fee.
- Total Payback: $100,000 x 1.15 = $115,000
- Total Interest: $15,000
- Total Cost (Interest + Fee): $15,000 + $2,000 = $17,000
- Periodic Rate (182 days): $17,000 / $100,000 = 0.17 (17%)
- Annualized (APR): (0.17 / 182) x 365 x 100 = 34.1% APR
This example demonstrates how a "15%" cost ($15k on $100k) actually results in a 34.1% APR once fees and the short time frame are considered.