Factor Rate
Last updated October 1, 2026
A factor rate is a decimal multiplier, usually written like 1.2 or 1.35, that sets the total cost of a merchant cash advance (MCA) or some short-term business loans.
The formula is simple. Total amount owed equals the amount funded times the factor rate. The cost of the financing equals that total minus the amount funded.
Example: a business receives $30,000 at a factor rate of 1.3.
- Total owed: $30,000 × 1.3 = $39,000.
- Cost: $39,000 − $30,000 = $9,000.
That $9,000 is fixed when the deal is signed. Unlike interest on a loan, it does not shrink as the balance is paid down. In most MCAs it also does not shrink if the business pays early, unless the contract offers an early payoff discount. Fees, such as an origination fee, may also be taken out of the funding. The business might then receive less than $30,000 while still owing $39,000.
Why it matters for lenders
A factor rate looks small next to an interest rate, but the two measure different things. An interest rate is a yearly cost on the remaining balance. A factor rate is a one-time charge on the original amount, no matter how fast repayment happens. The faster the money comes back, the higher the effective yearly cost.
Take the same $9,000 cost on $30,000. If repayment takes 12 months, the business pays $9,000 for a year's use of the money. If strong sales mean it repays in six months, it pays the same $9,000 for half the time, which roughly doubles the yearly cost.
For this reason, states with commercial financing disclosure laws, such as California and New York, require many offers to show an estimated annual percentage rate (APR) next to the total cost. They also set rules for estimating how fast repayment will happen. Funders use the factor rate to price risk: weaker files get higher rates, and good renewals often get lower ones.
How it works in practice
An underwriter at an MCA funder reviews a landscaping company's bank statements and settles on a $25,000 advance. Her pricing grid sets a 1.38 factor rate for this risk tier and a 12% holdback. The system calculates the purchased amount, $34,500, and the estimated daily payment from recent average deposits.
If the business is in a state with a disclosure law, the system builds the required disclosure from the same numbers, including the estimated APR and term. When pricing happens in a spreadsheet and the disclosure is typed up separately, the two can disagree, and that mismatch becomes a compliance problem.
Related terms
Merchant Cash Advance (MCA)
A merchant cash advance (MCA) gives a business a lump sum of cash today in exchange for a larger amount of its future sales. The funder collects a share of the business's receipts, often through daily or weekly ACH debits, until the agreed amount is delivered. MCAs are generally structured as a purchase of future receivables, not a loan.
Holdback
In a merchant cash advance, the holdback is the share of a business's daily or weekly sales that goes to the funder until the purchased amount has been delivered. It is also called the specified percentage, remittance rate or split. Many funders collect fixed ACH debits estimated from the holdback and adjust them through reconciliation when sales change.
Revenue-Based Financing
Revenue-based financing is business funding repaid as a percentage of the company's revenue until a set total, often called the cap, has been paid. Payments rise in strong months and fall in slow ones. Some providers structure it as a loan and others as a purchase of future revenue, and several US states regulate it as sales-based financing.
Commercial Financing Disclosure Laws
Commercial financing disclosure laws are state laws that require providers of business financing, including merchant cash advances, to give a standard summary of cost and terms before the deal is signed. As of October 2026, eleven states have them in force, with Vermont's law starting in July 2027.
Origination Fee
An upfront fee a lender charges for making a loan, usually set as a percentage of the loan amount or as a flat dollar fee. It covers the cost of reviewing, approving and closing the loan. The fee is often taken out of the loan proceeds at closing. In commercial real estate and private lending, it is often called points.
See how lenders put this into practice
FUNDINGO runs origination, servicing and reporting on one loan record inside Salesforce.