Factor Rate vs. APR: The True Cost of Short-Term Business Financing
Updated November 8, 2026
Short-term business financing is often quoted with a factor rate instead of an interest rate. A factor rate looks small and simple, which is why it is so easy to misread.
What a factor rate is
A factor rate is a multiplier, commonly written as a decimal such as 1.2 or 1.4. You multiply it by the amount you receive to get the total you must repay:
For $50,000 at a 1.3 factor, you repay $65,000. Unlike interest on an amortizing loan, that $15,000 charge is usually fixed from the start, so paying early may not save anything. Ask about this before you sign.
Why 1.3 is not 30%
A 30% APR would mean paying 30% a year on the balance you still owe. With short-term financing, you repay quickly, often through daily withdrawals, so you have the full amount for only a very short time. Compare two ways of borrowing $50,000:
| 1.3 factor, 6 months | 12% term loan, 3 years | |
|---|---|---|
| Payments | $516 per business day | $1,661 per month |
| Total charge | $15,000 | $9,786 |
| Approximate APR | 109% | 12% |
The example assumes 126 business days, before any added fees. Although the short-term option lasts only half a year, its annualized cost is about nine times higher.
Cash flow matters as much as cost
Daily payments in this example come to about $10,800 a month, compared with $1,661 for the term loan. That can be a serious strain on a small business, particularly a seasonal one. Before you accept any offer, compare the monthly equivalent with what your business actually brings in during a slow month.
Merchant cash advances
A merchant cash advance is structured as a purchase of your future sales, not a loan. Because of that, it may not be subject to the same lending rules, and repayment is often taken as a share of card sales. Some states now require APR-style disclosures for commercial financing, but many do not, so you may have to do the math yourself.
When expensive financing can still make sense
High-cost capital can be justified if it funds something with a fast and fairly certain return, such as buying inventory you already have orders for. It is much harder to justify when used to cover ongoing losses or to pay off another advance. Stacking several advances at once is a common route to serious trouble.
Questions to ask any lender
- What is the APR, including all fees?
- What is the total amount I will repay?
- How often are payments taken, and how much?
- Do I save anything if I pay early?
- Is a personal guarantee or a lien on business assets required?
It is also worth checking cheaper options first, including bank loans, credit unions, SBA-backed loans, Community Development Financial Institutions (CDFIs) and business lines of credit. An accountant or attorney can review the contract before you sign.
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This article is general information, not financial, tax, legal or insurance advice. Figures are illustrative examples.