How do I convert a factor rate to an APR?
Sterling's answer You need three things: the cash you actually receive, the total you pay back, and how many payments it takes. Put those in a calculator and a 1.35 over six months comes out at about 126% a year, not 35%.
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See who'll fund meTo convert a factor rate to APR, you need the cash you actually receive, the total payback and the payment schedule. The APR is the yearly rate that makes those payments add up to that cash. A $10,000 advance at 1.35, repaid daily over 6 months, works out at about 126% APR.
Why the factor alone misleads
A factor of 1.35 means you pay back 1.35 times the advance. The $3,500 cost is fixed from day one. But you pay it down every business day, so by month three you are paying full price on money you have mostly returned. A yearly rate accounts for that. The factor does not.
The method, step by step
- Find the net cash. Take the advance and subtract any fees deducted before the money reaches you.
- Find the total payback. Advance × factor, plus any fees charged during the term.
- Count the payments. Daily usually means business days. Over 6 months, at 21 business days a month, that is 126 payments.
- Solve for the rate. The APR is the annual rate at which the stream of payments, discounted back, equals the net cash. That needs a calculator or a spreadsheet's RATE function, which is what the MCA APR calculator does for you.
A quick sanity check: divide the cost by the advance, divide by the term in years, then roughly double it. For 1.35 over 6 months that is 35% ÷ 0.5 = 70%, nearly doubled to the true figure of about 126%.
The table
Every figure below is for a $10,000 advance. The APR doesn't change with the amount, so it holds for $50,000 or $500,000.
| Factor | 3 mo daily | 6 mo daily | 6 mo weekly | 12 mo daily | 18 mo daily |
|---|---|---|---|---|---|
| 1.10 | 76.4% | 38.5% | 37.4% | 19.3% | 12.9% |
| 1.20 | 148.5% | 74.8% | 72.8% | 37.5% | 25.0% |
| 1.25 | 183.2% | 92.2% | 89.9% | 46.3% | 30.9% |
| 1.30 | 217.1% | 109.3% | 106.6% | 54.8% | 36.6% |
| 1.35 | 250.2% | 125.9% | 122.9% | 63.2% | 42.1% |
| 1.40 | 282.7% | 142.2% | 138.9% | 71.3% | 47.6% |
| 1.50 | 345.7% | 173.8% | 170.1% | 87.2% | 58.2% |
Read across a row and the pattern is plain: the same factor gets cheaper per year the longer you have to repay.
What the law says about disclosure
Some states now make providers show this number. New York's regulation covers commercial financing up to $2,500,000, including sales-based financing, and sets out how providers calculate the finance charge and APR. For sales-based deals, the disclosure must say the APR is estimated and may vary because your actual income may differ from the provider's estimate. California requires covered providers to disclose the total cost of the financing expressed as an annualized rate.
Outside those states, you may not get an APR on the offer. Work it out yourself.
What to do next
- Get the net cash, total payback and payment count in writing.
- Run them through the MCA APR calculator, or the offer checker if you have more than one offer.
- Use Sterling's rule of thumb to read the result: under 20% is priced like bank lending, 20–50% is in line with many online term loans, 50–100% is expensive short-term money, and over 100% is very expensive.
Run your own numbers: Factor rate to APR converter
Estimated APR
125.9%
Very expensive.
- You receive
- $50,000
- You pay back
- $67,500
- Cost of the money
- $17,500
- Cost per $1 received
- $0.35
- 126 daily payments of
- $535.71
- Effective annual rate
- 251.1%
An estimate on the money you actually receive, with daily payments counted as 21 business days a month. Not an offer and not a lender's disclosure.
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Questions owners ask
Can I just divide the factor cost by the term?
That gives you a simple rate, and it understates the cost. Because you repay as you go, your average balance is about half the advance, so the true APR comes out close to double the simple figure.
Why does the APR change with the term but not the amount?
The APR measures cost against time and money in use. Doubling the advance doubles both the cost and the money, so the rate holds. Shortening the term squeezes the same cost into less time, so the rate rises.
Do I use the advance amount or what lands in my account?
What lands in your account. If fees are deducted up front, use the net figure, because that is the money you actually had to use.
Do providers have to tell me the APR?
In some states, yes. California and New York both have commercial financing disclosure laws that require an annualized cost figure on covered offers.