Factor Rate vs APR
Factor rate vs APR comparison illustrates the difference between MCA's flat factor rate pricing and traditional loan APR pricing — the same factor rate produces dramatically different APR-equivalent costs depending on repayment timeline.
Why This Matters
The factor rate vs APR distinction is critical for merchant understanding of MCA cost. A 1.30 factor rate sounds simple ('repay 1.3x what you borrowed') but APR-equivalent cost depends on repayment timeline. Same 1.30 factor at 90-day repayment is roughly 120% APR-equivalent; at 180 days roughly 60% APR-equivalent; at 365 days roughly 30% APR-equivalent. Merchants used to thinking in APR terms often misunderstand factor-rate pricing without proper translation. State commercial finance disclosure laws (NY, CA, VA, others) specifically require APR-equivalent disclosure to prevent merchant misunderstanding.
Frequently Asked Questions
Frequently Asked Questions
Why doesn't MCA quote APR instead of factor rate?
Historical industry convention developed before disclosure regulations. Factor rate is computationally simpler than APR for variable-payment products. APR calculation requires assumed repayment timeline that varies with merchant revenue. Modern disclosure laws now require APR-equivalent calculation; many funders provide both factor rate and APR-equivalent in term sheets.
How do merchants properly compare MCA cost across funders?
Through APR-equivalent calculation using consistent repayment timeline assumption. Or through total dollar cost comparison (origination fee + total payback - net funded amount). Comparing factor rates alone misleads when funders have different fee structures or expected repayment timelines.