A factor rate is a decimal, often between about 1.1 and 1.5, that you multiply by the amount funded to get the total you repay. It is not an interest rate. Because the fee is fixed and repayment is short, a 1.30 factor rate on a six-month advance with daily payments works out to an APR above 100%.
How does a factor rate work?
The math takes one line:
Total repayment = amount funded × factor rate
On a $50,000 advance at a 1.30 factor rate, you repay $50,000 × 1.30 = $65,000. The cost of the money is the difference, $15,000.
That cost is set on day one. It doesn't change if you repay faster, and it doesn't shrink as your balance goes down. Those two facts are why a factor rate and an interest rate can't be compared directly.
Why isn't 1.30 the same as 30% interest?
Three differences, and each one makes the factor rate more expensive than it looks.
- Time isn't built in. A 30% APR means 30% per year. A 1.30 factor rate means 30% total, whether you repay in 4 months or 14. Over a short term, 30% total is a much higher annual rate.
- The fee is charged on the full original amount. With an amortizing loan, interest accrues only on what you still owe. With a factor rate, you pay the full fee even though you're paying the balance down from the first week. Your average balance over the term is roughly half the original amount, so the effective rate is roughly double the simple calculation.
- Early payoff usually saves nothing. Interest stops when you pay off a loan. A factor-rate balance is typically owed in full unless the contract offers a prepayment discount.
How do I convert a factor rate to APR?
There are two ways: a quick estimate that understates the cost, and an exact calculation.
The quick estimate
Divide the fee by the term in months, then multiply by 12:
(1.30 − 1) ÷ 6 months × 12 = 60% simple annualized rate
This gives a floor, not an answer. It assumes you hold the full $50,000 for the entire six months, which you don't.
The exact calculation
APR is the rate at which your payments, discounted back to day one, equal the cash you actually received. Any spreadsheet solves this with the RATE function:
=RATE(number_of_payments, -payment_amount, net_amount_received) * payments_per_year
For $50,000 at 1.30, repaid in daily payments over six months (126 business days):
- Daily payment: $65,000 ÷ 126 = $515.87
=RATE(126, -515.87, 50000) * 252= about 109.3% APR
The 252 is the approximate number of business days in a year, which is how daily-debit products are typically scheduled. For weekly payments, use 52. For monthly, use 12.
Worked conversions: what do common factor rates equal in APR?
Every row below is a $50,000 advance with no separate fees. Daily schedules assume 21 business days a month.
| Factor rate | Term | Schedule | Payment | Total cost | APR |
|---|---|---|---|---|---|
| 1.15 | 12 months | 52 weekly | $1,105.77 | $7,500 | 28.1% |
| 1.20 | 6 months | 126 daily | $476.19 | $10,000 | 74.8% |
| 1.30 | 6 months | 126 daily | $515.87 | $15,000 | 109.3% |
| 1.30 | 6 months | 26 weekly | $2,500.00 | $15,000 | 106.6% |
| 1.30 | 12 months | 252 daily | $257.94 | $15,000 | 54.8% |
| 1.30 | 12 months | 12 monthly | $5,416.67 | $15,000 | 51.4% |
| 1.40 | 9 months | 189 daily | $370.37 | $20,000 | 95.0% |
Three things stand out:
- Term drives APR more than the factor rate does. The same 1.30 costs 109.3% over six months and 54.8% over twelve.
- Payment frequency matters less than people think. Daily versus weekly on the same term moves the APR by only a few points. Daily payments matter more for cash flow than for cost.
- A lower factor rate isn't automatically cheaper. A 1.20 over six months (74.8%) is a higher APR than a 1.30 over twelve months (54.8%), though it costs fewer total dollars.
How do fees change the APR?
Fees deducted at funding raise the APR because you pay the same amount back on less money.
Say the same $50,000 advance at 1.30 over six months carries a 3% origination fee, deducted up front:
- Cash deposited: $50,000 − $1,500 = $48,500
- Total repaid: still $65,000
- Total cost: $65,000 − $48,500 = $16,500
=RATE(126, -515.87, 48500) * 252= about 122.7% APR
A 3% fee added 13 points of APR. Always run the calculation on the net amount that lands in your account, not the headline amount.
What happens if I pay off a factor-rate loan early?
Usually nothing good. If you repay the $50,000 advance in three months instead of six, you still owe the full $65,000 unless the contract says otherwise. Some providers offer an early-payoff discount, which forgives part of the remaining fee. Ask for it in writing before you sign, and ask how it's calculated.
Compare that with a term loan or a line of credit priced with interest. Paying one of those off early cuts the interest you owe, because interest accrues only on the outstanding balance for the time it's outstanding.
Where will I see factor rates?
- Merchant cash advances. Usually structured as a purchase of future receivables, priced almost entirely in factor rates.
- Short-term business loans. Some online lenders quote a factor rate or a flat "total payback" on terms under 18 months.
- Invoice factoring, in a different form. Factoring charges a discount fee, typically 1–5% of the invoice value, rather than a factor rate. The same conversion logic applies. A 3% fee on an invoice your customer pays in 30 days is about 36% on a simple annualized basis (3% × 12). On a customer who pays in 60 days, the same 3% annualizes to about 18%.
Do lenders have to show me the APR?
Not under federal law. The Truth in Lending Act, which requires APR disclosure on consumer loans, exempts credit extended for business purposes. A growing number of states fill part of that gap, and as of 2026 two of them require an APR:
| State | APR required? | Covers offers up to | Effective |
|---|---|---|---|
| California | Yes | $500,000 | December 9, 2022; expanded January 1, 2026 |
| New York | Yes | $2,500,000 | August 1, 2023 |
| Utah, Virginia, Florida, Georgia, Kansas, and others | No; total cost and repayment terms instead | Varies by state | 2022–2025 |
California's 2026 update (SB 362) goes further. For offers of $500,000 or less, providers must state the APR whenever they quote a price or rate during the application, and may not describe a factor rate or fee rate as "interest" or a "rate" in a way that could mislead you.
If you're in a state without an APR requirement, calculate it yourself with the formula above. State disclosure laws generally require the amount funded and the total repayment, and those two numbers plus the payment schedule are all you need.
Is a factor rate ever the right choice?
Sometimes. Factor-rate products are fast, lenient on credit, and built for short, specific needs. They can make sense when:
- The money funds something with a quick, known payback, such as inventory you already have orders for.
- The return is clearly larger than the fee. If $50,000 in materials produces $80,000 in gross profit within four months, a $15,000 cost may be worth paying.
- Speed matters more than price, and cheaper options would arrive too late.
They make less sense for long-term investments, ongoing expenses, or anything where the payback is uncertain. For those, a longer-term, interest-priced product usually costs less even when approval takes longer.
How do I compare my options?
Convert everything to the same terms: the net amount you receive, the total you repay, the APR, and the payment per month. Sagamore is a broker, not a lender, and presents matched offers with rates, terms, and total repayment amounts so you can put them side by side. You can start your application here.
