Factor Rate: Meaning in a Merchant Cash Advance
A factor rate is the multiplier a funder uses to set how much you pay back on a merchant cash advance. You multiply the amount advanced by the factor rate to get the total the funder collects from your future sales, and it's written as a decimal rather than a percentage.
What does factor rate mean?
Picture a funder offering to buy a slice of your future card sales. They decide how much cash to hand you today and how much of your future sales they get in return. The factor rate is the link between those two numbers. A factor rate close to one means you pay back only a little more than you receive. A higher one means you pay back more. Unlike an interest rate, it doesn't grow the longer the advance runs, because the total is fixed on day one.
Why does factor rate matter to your business?
The factor rate tells you the total cost, but not how fast you pay it. Two offers with the same factor rate feel very different if one collects over a short stretch and the other over a long one. That's why owners who only compare factor rates end up surprised. Look at the factor rate together with the daily or weekly payment and the estimated term, and ask what fees come out before the money reaches your account.
What should you ask about a factor rate?
Ask whether the factor rate applies to the full advance or to the amount after fees. Ask how the payment was sized from it, and whether the contract offers any early payoff discount. Those three answers turn a single decimal into a clear picture of what the money costs your business.
Where will you see it?
On the offer summary, usually next to the advance amount and the total payback. Some contracts don't print the factor rate at all and only show the purchase price and the purchased amount, so you divide one by the other to find it.
Which terms are related to factor rate?
The full list is in the glossary. Owners ask about this in Is an MCA factor rate monthly or for the whole advance?.
A term on your offer you don't recognize?
Send us the line and we'll tell you what it means. Call 877-FUND-654 with any question. We call you back, usually the same business day, and we always talk with you before we shop your file.