How to Convert a Factor Rate to APR, With Examples
To convert a factor rate to an APR, find the payment schedule, then solve for the yearly rate that makes those payments equal the cash you received. A $40,000 advance at a 1.30 factor, repaid over 126 business days, works out to about 109% APR.
Who should read this: owners holding an offer that shows a factor rate who want the yearly cost as a number they can compare with a card, a loan or a second offer.
On this page
- What do you need before you convert a factor rate?
- Example 1: how do you convert a daily debit offer?
- Example 2: does a weekly payment change the APR?
- Example 3: how do fees taken at funding change the APR?
- Example 4: what happens to the APR if you pay off early?
- How do you check the APR on your own offer?
- Factor rate to APR questions
- Sources
What do you need before you convert a factor rate?
You need four inputs: the purchase price, the factor rate, the payment amount and how frequently the payment is taken.
A factor rate alone can't become an APR, because APR depends on time. A 1.30 factor costs 30 cents per dollar whether the advance is collected in four months or twelve. What changes is how long you hold the money, and that's what a yearly rate measures.
| Input | Where to find it on the offer | Example 1 |
|---|---|---|
| Purchase price | The cash the funder pays for a share of your future sales | $40,000 |
| Factor rate | The multiplier on the purchase price | 1.30 |
| Purchased amount | Purchase price times the factor rate | $52,000 |
| Payment and frequency | The daily or weekly debit, or the split of card sales | $412.70 per business day |
| Fees withheld | Fees taken out of the purchase price at funding | None |
If the contract collects a split of card sales instead of a fixed debit, start from the funder's estimated term. Then rerun the math with a faster and a slower term, so you see the range and not one point.
Example 1: how do you convert a daily debit offer?
Take a $40,000 advance at a 1.30 factor, collected by an equal debit every business day for 126 business days, with no fees.
- Purchased amount: $40,000 times 1.30 is $52,000, so the total cost is $12,000.
- Daily debit: $52,000 divided by 126 business days is $412.70.
- Rate per business day: solve for the rate that discounts 126 debits of $412.70 back to $40,000. In a spreadsheet, =RATE(126,-412.70,40000) returns 0.434%.
- Yearly rate: 0.434% times 252 business days is about 109% APR.
Why does the simple math get it wrong?
Dividing the cost by the advance gives 30%, and dividing that by half a year gives 60%. That understates the cost, because the debits start on the first business day, so on average you hold only about half the money for the term. Doubling the simple figure gives 120%, which overshoots a little. The exact answer sits between them.
Example 2: does a weekly payment change the APR?
Yes, a little. The same $52,000 collected as 26 weekly payments of $2,000 gives =RATE(26,-2000,40000) times 52, or about 107% APR.
Weekly debits leave each dollar with you a few days longer, so the APR comes in under the daily version of the same deal. The gap is small next to the effect of the term:
| Schedule | Payment | Approximate APR |
|---|---|---|
| Daily, 126 business days | $412.70 | About 109% |
| Weekly, 26 weeks | $2,000.00 | About 107% |
| Daily, 189 business days | $275.13 | About 73% |
| Daily, 252 business days | $206.35 | About 55% |
The total cost is $12,000 in every row. Only the time you hold the money changes, and the APR follows it.
Example 3: how do fees taken at funding change the APR?
A fee withheld at funding cuts the cash you receive while the payback stays the same. Take example 1 with a $1,200 fee taken out of the purchase price: you receive $38,800 and still repay $52,000.
=RATE(126,-412.70,38800) times 252 is about 123% APR. A fee of 3% of the purchase price adds about 14 points to the APR on this six-month advance. Run the APR on the cash that reaches your account, not on the purchase price.
Example 4: what happens to the APR if you pay off early?
With no early payoff discount, paying sooner raises the APR, because the full $12,000 cost is paid in less time. Pay the example 1 advance for 63 business days, then clear the remaining $26,000 in one payment, and the APR comes to about 142%.
A discount changes the math. If the contract takes $3,000 off the remaining balance for paying early, the total cost falls to $9,000 and the APR to about 111%. Ask whether your contract has an early payoff discount, and get the payoff figure in writing before you plan around it. The early payoff calculator runs this on your numbers.
How do you check the APR on your own offer?
- Write down the cash you'll receive after fees.
- Write down the payment and how frequently it's taken.
- Count the payments: the purchased amount divided by the payment.
- Enter =RATE(count,-payment,cash) and multiply by 252 for business-day debits or by 52 for weekly ones.
- Compare your result with any APR shown on the offer, and ask the funder about a gap.
The MCA APR calculator does the same math. For why one factor gives such different costs by term, see factor rate vs APR.
Factor rate to APR questions
Owners checking an offer ask these.
Is there a quick formula to turn a factor rate into an APR?
There's no exact shortcut, because the answer depends on the schedule. For a quick check on a daily-debit advance, double the cost and divide by the term in years: a 1.30 factor over six months gives 0.30 times 2, divided by 0.5, or 120%. The exact answer is a little lower, here about 109%.
Why is the APR on an MCA so much higher than the factor rate?
The factor rate states the total cost once, for the whole term. An APR states the cost per year on the money you still hold. Because repayment starts on the first business day and the term is short, the yearly rate comes out several times the factor's cost percentage.
Should I compare offers by factor rate or by APR?
Compare by both, plus the net cash after fees. The factor rate shows total dollars when two offers have the same term. The APR shows which costs more per year when the terms or fees differ. The offer comparison tool puts them side by side.
Does a split-of-sales advance have an APR?
It has an estimated APR, based on how long the funder expects collection to take. If sales run faster than the estimate, the advance is collected sooner and the real APR rises; slower sales lower it. Run the math at the estimate and at a faster and a slower term.
Questions owners ask about this
Is there a simple formula from factor rate to APR?
There is no one-step formula, because APR depends on the term. Use RATE with your real payment schedule.
Why is an MCA's APR so much higher than its factor rate?
The factor rate is a one-time multiple. APR spreads that cost over a year, and short terms make it larger.
Should I compare offers by factor rate or APR?
Compare both, plus the total dollar cost and the payment your deposits can carry.
Does a split-of-sales advance have an APR?
Only as an estimate, because the term depends on your future sales.
How do fees change the APR?
Fees taken at funding lower the cash you receive, which raises the APR.
Sources
- The Consumer Financial Protection Bureau publishes Appendix J, the actuarial method for computing an annual percentage rate. The examples here apply the same approach to business-day payments.
- Microsoft's RATE function reference explains the spreadsheet formula used in each example.
- Method: the estimated APR is the rate per payment that makes your payments worth the cash you received, times 252 for business-day debits or 52 for weekly debits. Every figure here uses it. These are worked cases, not typical offers.
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