Factor Rate
A factor rate is the multiplier applied to an MCA advance amount to determine total repayment — expressed as a decimal (1.20 to 1.50 typical) — representing a flat cost of capital independent of repayment duration, fundamentally different from APR-based interest.
Why This Matters
Factor rates are the pricing mechanism that makes MCA fundamentally different from APR lending. There's no time component — a merchant pays the factor regardless of whether repayment takes 3 months or 12 months. First-position MCA factor rates typically range 1.15–1.45; second-position 1.30–1.55; third-position and specialty programs 1.45–1.75+. Factor rate is the primary pricing lever underwriters use to price risk: higher-risk merchants get higher factors, lower-risk get competitive pricing.
Example
A $40,000 advance at 1.30 factor: total payback = $40,000 × 1.30 = $52,000. The merchant repays $52,000 regardless of whether the holdback collects it in 3 months or 8 months. The funder's gross margin is the $12,000 spread, less origination costs and default reserves.
Frequently Asked Questions
Frequently Asked Questions
Is a factor rate the same as an interest rate?
No. Factor rate is a flat cost multiplier, not an annualized rate. Converting factor rates to APR produces very high percentages because MCA repayment cycles are short. The legal distinction between factor and interest is what allows MCA to exist outside state usury frameworks.
What factor rate is competitive in MCA?
First-position deals: 1.20-1.40 is competitive, 1.15-1.25 is premium pricing for top-tier merchants. Second-position: 1.30-1.50 standard. Higher-risk industries (restaurants, trucking) trend higher in each tier. Factor rate is the single biggest pricing lever in MCA underwriting.