Factor Rate
A factor rate is a pricing format used in merchant cash advances and some short-term business financing, expressed as a decimal multiplier (such as 1.25) applied to the funded amount to determine total repayment. Unlike an interest rate, it is a fixed cost that does not change with how quickly the advance is repaid.
How a Factor Rate Works
A factor rate prices financing as a simple multiplier rather than as interest that accrues over time. The total a borrower repays is the funded amount multiplied by the factor rate. An advance of 50,000 dollars at a factor rate of 1.40 means the borrower repays 70,000 dollars, a fixed 20,000 dollars of cost, regardless of how fast or slow the balance is paid down. Factor rates typically run from about 1.1 to 1.5.
Factor Rate Versus Interest Rate
The crucial difference is that a factor rate is fixed at funding and does not shrink with early repayment. With an interest rate, paying off a loan early reduces the total interest paid. With a factor rate, the dollar cost is locked in the moment the advance is made, so repaying a merchant cash advance early does not reduce what is owed unless the funder offers an explicit discount. This is why a factor rate that looks small can represent a very high effective annualized cost.
Converting a Factor Rate to an APR
Because repayment usually happens over a short window through daily or weekly remittances, the annualized cost of a factor rate is far higher than the multiplier suggests. Translating it into an approximate APR requires the total cost, the funded amount, and the expected repayment period. A 1.40 factor rate repaid over six months implies an annualized cost many times the 40 percent headline, which is the core reason factor-rate pricing is scrutinized for transparency.
Why It Matters for Funders
For a merchant cash advance funder, the factor rate sets the gross economics of every deal, and actual yield depends on collecting the agreed remittances on schedule. Missed and bounced payments stretch the repayment period and erode the realized return. Zolvo helps funders reconcile daily and weekly remittances against expected amounts, detect missed payments early, and monitor portfolio performance, so the return implied by the factor rate is actually realized.
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