Factor Rate vs APR: What Small Business Owners Need to Know Before Borrowing
- Jason Feimster
- 2 days ago
- 9 min read
Not all business financing costs are created equal. While traditional loans use APR, alternative lenders often quote factor rates that can obscure the true borrowing cost. Understanding the difference could save you thousands on your next funding round.
Key Takeaways
Factor rates multiply your borrowed amount (e.g., 1.3 factor = $13,000 repaid on $10,000 borrowed)
APR shows annualized cost as a percentage—the only way to compare loans fairly
A 1.3 factor rate on a 6-month loan = 60% APR, not 30%
Merchant cash advances often hide true costs behind factor rates
Always convert factor rates to APR before signing anything
Bank Breezy's "Meet or Beat" guarantee means you'll never overpay compared to other offers
There's nothing worse than sitting across from a lender who just quoted you a "1.25 factor rate" while you're trying to figure out if that's better than the 18% APR your buddy mentioned last week.
You need money today to cover payroll or fix the truck that broke down on a job site, and now you're doing mental math instead of getting a straight answer.
You're not stupid. They're being deliberately confusing.
Why Alternative Lenders Use Factor Rates Instead of APR
Banks are required to show you APR (Annual Percentage Rate) because federal lending laws demand transparency.
But alternative lenders—merchant cash advance companies, revenue-based funders, and short-term business loan providers—often operate in a gray area where they can quote "factor rates" instead.
Here's why they do it: Factor rates sound smaller than APRs.
A 1.3 factor rate sounds reasonable, maybe even cheap. But that same loan might carry a 78% APR depending on the repayment term. If they told you 78% upfront, you'd walk away. So they bury the real cost behind multiplication instead of percentages.
This isn't illegal in most cases. It's just intentionally unclear. And when you're desperate for cash, clarity is the last thing predatory lenders want to give you.
What Is a Factor Rate?
A factor rate is a decimal multiplier (usually between 1.1 and 1.5) that determines how much you'll repay on a loan or cash advance.
The formula is simple:
Amount You Receive × Factor Rate = Total Repayment
Example:
You borrow: $10,000
Factor rate: 1.3
You repay: $10,000 × 1.3 = $13,000
That means you're paying $3,000 in fees to borrow $10,000.
Straightforward, right?
Not so fast.
The problem isn't the math—it's the timeframe. I
f you repay that $13,000 over 12 months, that's one cost.
If you repay it over 3 months, it's an entirely different (and much more expensive) cost.
Factor rates ignore time. APR doesn't.
What Is APR?
APR (Annual Percentage Rate) is the annualized cost of borrowing money, expressed as a percentage. It's the universal standard for comparing loans because it accounts for both the fee and the repayment period.
Banks, credit cards, mortgages—they all use APR. Why? Because it allows you to compare a 5-year car loan at 6% APR to a 30-year mortgage at 4% APR and know which one is actually cheaper per year.
APR levels the playing field.
When a merchant cash advance company refuses to give you an APR, they're taking away your ability to compare. They want you to think a 1.4 factor rate is "only 40% more than what you borrowed"—without mentioning that you're repaying it in 4 months, which equals a 120% APR.
How to Convert Factor Rate to APR
Here's the formula:
APR = [(Factor Rate - 1) ÷ Repayment Period in Years] × 100
Let's break it down with real examples.
Example 1: 6-Month Loan with a 1.3 Factor Rate
Factor rate: 1.3
Repayment period: 6 months (0.5 years)
APR = [(1.3 - 1) ÷ 0.5] × 100
APR = [0.3 ÷ 0.5] × 100
APR = 60%
So that "1.3 factor rate" is actually a 60% APR.
Example 2: 3-Month Cash Advance with a 1.25 Factor Rate
Factor rate: 1.25
Repayment period: 3 months (0.25 years)
APR = [(1.25 - 1) ÷ 0.25] × 100
APR = [0.25 ÷ 0.25] × 100
APR = 100%
That "small" 1.25 factor rate just turned into a 100% APR because you're repaying it so fast.
Example 3: 12-Month Business Loan with a 1.2 Factor Rate
Factor rate: 1.2
Repayment period: 12 months (1 year)
APR = [(1.2 - 1) ÷ 1] × 100
APR = 20%
Now that's more reasonable—but notice how the same type of product can range from 20% to 100% APR depending on the term.
Why Short-Term Factor Rate Loans Are So Expensive
The shorter the repayment period, the more brutal the APR becomes. Here's why:
You're cramming the same total cost into a much smaller window of time. A $3,000 fee spread over 12 months is expensive. That same $3,000 fee compressed into 3 months is catastrophic.
This is where merchant cash advances (MCAs) become dangerous. They often:
Use factor rates between 1.2 and 1.5
Require repayment in 3 to 9 months
Deduct payments daily or weekly from your revenue
The result? APRs that routinely hit 80% to 150%—and in extreme cases, over 200%.
That's not funding. That's a financial trap.
When Factor Rates Make Sense (And When They Don't)
Factor Rates Might Work If:
You need cash immediately (like, today) for an emergency
You have a specific, high-margin project that will pay out quickly
You've exhausted all other options and understand the true cost
You can repay in full within weeks, not months
Factor Rates Are a Bad Idea If:
You're using them to cover ongoing cash flow problems
You don't know the APR equivalent
The repayment term is longer than 3 months
You're stacking multiple cash advances (a death spiral)
Bottom line: Factor rates are a tool for emergency capital, not sustainable growth.
How Bank Breezy's Revenue-Based Funding Compares
Here's where transparency matters. At Bank Breezy, we don't hide behind factor rates. We show you:
Exact repayment amount upfront
Clear APR equivalent
Flexible terms (not just 90-day sprints)
No prepayment penalties—pay off early, save money
And here's the kicker: our "Meet or Beat" Price Guarantee means if you get a better offer elsewhere, we'll match it or give you $500.
No games. No bait-and-switch.
Why Revenue-Based Funding Works Better
Instead of fixed daily debits that choke your cash flow during slow weeks, revenue-based funding adjusts to your income. When you have a big week, you pay more. When it's slow, you pay less.
Soft credit pull only—no hard inquiry tanking your score
Funds in 24 hours (sometimes same day)
No collateral required
Endorsed by NECA for construction and trade businesses
We look at your revenue, not your credit score. Because a 680 credit score doesn't tell us if you're doing $100K a month in sales.
5 Rules to Avoid Overpaying on Business Funding
1. Always Convert Factor Rates to APR
Use the formula above. If the lender won't tell you the repayment term, walk away. They're hiding something.
2. Compare Apples to Apples
A 6-month loan at 30% APR is cheaper than a 3-month cash advance at 1.2 factor rate (which is 80% APR). Don't let different formats confuse you.
3. Avoid Stacking Multiple Cash Advances
Each new advance compounds the problem. You end up paying 60%+ of your revenue to lenders instead of keeping it in your business.
4. Read the Fine Print on Renewals
Some lenders offer "renewals" that reset the factor rate on the remaining balance—effectively charging you twice.
5. Use Bank Breezy's "Meet or Beat" Guarantee
Get your best offer from another lender. Then bring it to us. We'll either beat it or pay you $500 for wasting your time. Zero risk.
FAQ: Factor Rate vs APR
What is the difference between a factor rate and APR?
Factor rates vs APR: Factor rates are decimal multipliers (like 1.3) that show total repayment amount, while APR (Annual Percentage Rate) shows the annualized cost as a percentage. A 1.3 factor rate means you repay $1.30 for every $1 borrowed, but doesn't account for time. APR converts this to a yearly percentage, making it possible to compare different loans fairly. The same factor rate can equal vastly different APRs depending on repayment term—1.3 over 6 months = 60% APR, but over 3 months = 120% APR.
How do I convert a factor rate to APR?
Use this formula: APR = [(Factor Rate - 1) ÷ Repayment Period in Years] × 100. First, subtract 1 from the factor rate. Then divide by the repayment period expressed in years (6 months = 0.5 years, 3 months = 0.25 years). Finally, multiply by 100 to get the percentage. For example, a 1.25 factor rate over 3 months: [(1.25 - 1) ÷ 0.25] × 100 = 100% APR.
Why do merchant cash advance companies use factor rates instead of APR?
Lenders use factor rates because they sound smaller and less alarming than APR. A 1.3 factor rate sounds reasonable, but might actually represent a 60-120% APR depending on the term. Since many alternative lenders operate outside traditional banking regulations, they're not always required to disclose APR. This lack of transparency makes it harder for borrowers to compare offers and understand true costs, which benefits lenders offering expensive financing.
What is a good factor rate for a business loan?
There's no universally "good" factor rate because the repayment term determines the actual cost. However, factor rates typically range from 1.1 to 1.5. A 1.1 factor rate over 12 months equals about 10% APR (reasonable), while a 1.5 factor rate over 3 months equals 200% APR (predatory). Always convert to APR before judging whether a factor rate is fair. Generally, if the APR equivalent exceeds 40-50%, you're paying too much unless it's a true emergency.
Are merchant cash advances worth it for small businesses?
Merchant cash advances are rarely worth it for anything except true emergencies requiring same-day funding. While they offer fast access to capital without credit checks, the APR typically ranges from 80-200%, far higher than traditional loans. The daily or weekly payment structure can strangle cash flow, especially during slow periods. They make sense only if you have a specific, high-margin project that pays out quickly, you've exhausted all other options, and you fully understand the cost.
Can I negotiate a factor rate with a lender?
Factor rates are generally less negotiable than traditional loan terms because alternative lenders use automated risk-based pricing. However, you can negotiate by shopping multiple offers and leveraging competition. The best strategy is comparing multiple lenders' APR equivalents, then asking if they can beat a competitor's rate. Services like Bank Breezy's "Meet or Beat" guarantee formalize this—if you find better terms elsewhere, they'll match or beat them, removing negotiation entirely.
What happens if I can't repay a merchant cash advance?
Consequences vary by lender and contract terms, but typically include: continued automatic daily debits that overdraft your account (generating bank fees), collection calls and emails, potential legal action if you signed a confession of judgment, damage to your business credit, and frozen bank accounts in extreme cases. Unlike traditional loans, MCAs aren't usually reported to credit bureaus unless they go to collections. The daily payment structure makes defaults particularly damaging to cash flow and can create a debt spiral.
Is a 1.3 factor rate good or bad?
A 1.3 factor rate is neither inherently good nor bad—it depends entirely on the repayment term. Over 12 months, it equals 30% APR (expensive but not predatory). Over 6 months, it's 60% APR (very expensive). Over 3 months, it's 120% APR (predatory). For context, credit cards average 18-24% APR and SBA loans range from 6-13% APR. A 1.3 factor rate is only acceptable for emergency funding over a longer term (9-12 months minimum) when no better options exist.
How does revenue-based financing differ from factor rate loans?
Revenue-based financing charges a percentage of your actual monthly or weekly revenue, so payments flex with your cash flow—you pay more during strong periods and less during slow ones. Factor rate loans (like merchant cash advances) typically require fixed daily or weekly payments regardless of revenue fluctuations. While both may use factor rates to calculate total repayment, revenue-based financing is less likely to choke your cash flow during downturns. However, both can be expensive—always check the APR equivalent.
What is Bank Breezy's "Meet or Beat" guarantee?
Bank Breezy's "Meet or Beat" guarantee means if you receive a better funding offer from another legitimate lender, Bank Breezy will either match those terms or beat them—or pay you $500 for your time. This eliminates negotiation and comparison shopping risk. You apply to Bank Breezy, get your offer, then shop it around. If you find better terms elsewhere, you bring that offer back and Bank Breezy adjusts their terms or compensates you. It's designed to ensure you never overpay compared to market alternatives.
The Bottom Line: Know What You're Paying Before You Sign
Factor rates aren't inherently evil—but they're often used to obscure the true cost of borrowing. A 1.3 factor rate on a 6-month loan is a 60% APR. On a 3-month loan? 120% APR.
You wouldn't accept a credit card with a 100% APR. Don't accept it for your business either—unless you understand exactly what you're getting into.
The working class economy deserves better than predatory lending disguised as "fast funding."
At Bank Breezy, we believe in:
Transparency: Clear APR, clear terms, no surprises
Speed: Funds in 24 hours, soft credit pull only
Fairness: "Meet or Beat" guarantee—you'll never overpay
If you need funding today, don't settle for confusing factor rates and hidden costs.
Get a straight answer and a fair deal.
Apply now at Bank Breezy and see your real APR in minutes—not after you've already signed.
Because your business deserves funding that works for you, not against you.
