How MCA Factor Rates Translate to Actual APR

The Number That Hides Inside Another Number

A factor rate of 1.3 sounds benign. It suggests a 30 percent cost of capital, which, while high, sits within the range of what a business owner in a difficult position might consider acceptable. The problem is that a factor rate of 1.3 does not represent a 30 percent annual cost. It represents a 30 percent flat cost on capital that is repaid incrementally over months, which means the effective annual percentage rate is two, three, or sometimes four times that figure. The gap between what the number appears to mean and what it actually costs is the central mechanism of MCA pricing.

The arithmetic is not complex but it is, if we are being precise, not intuitive either. A business receives a $100,000 advance at a factor rate of 1.3. The total repayment is $130,000. If that repayment occurs over twelve months in equal daily installments, the business is paying $30,000 in fees on an average outstanding balance of roughly $50,000, because each payment reduces the balance. The effective annual rate is approximately 60 percent. If the same repayment occurs over six months, the effective rate doubles. Over four months, it approaches 180 percent.

The factor rate is indifferent to time. Whether the merchant repays in three months or twelve, the total cost is the same: $130,000. This is the structural inversion that separates factor-rate pricing from interest-rate pricing. In a loan, paying early reduces total interest. In an MCA, paying early does not reduce the premium. It compresses it into a shorter period, which increases the effective annual cost.

The factor rate is a price. The APR is the cost of that price measured against time. They are not the same number, and the contract does not bridge the distance between them.

New York’s Commercial Finance Disclosure Law and California’s SB 1235 now require MCA funders to disclose an estimated APR alongside the factor rate. This is a disclosure requirement, not a prohibition. The rates themselves remain uncapped. But the disclosure has shifted the conversation. A business owner who sees “factor rate: 1.25” may sign. A business owner who sees “estimated APR: 89%” may pause. That pause is the entire purpose of the regulation.

The Compounding Effect of Stacking

The factor-rate calculation becomes catastrophic when a business takes a second advance before the first is repaid. This practice, known as stacking, is not unusual. It is, in many segments of the MCA market, the standard trajectory. A business takes an initial advance, discovers the daily payments constrain cash flow, and accepts a second advance to cover the shortfall created by the first. The second advance carries its own factor rate applied to its own principal, and both sets of daily withdrawals now compete for the same revenue.

In a file we reviewed in January, a catering company had accepted four MCA advances within eleven months. The combined factor rates produced a blended effective APR exceeding 300 percent. The daily ACH withdrawals totaled more than $1,800. The business’s average daily revenue was $2,400. Six hundred dollars per day remained for payroll, rent, supplies, insurance, and the owner’s draw. The math could not hold. It rarely can at that level of extraction.

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The factor rate, standing alone, is a number. The APR, calculated against actual repayment timing, is the truth the number contains. The distance between them is where the cost of an MCA resides, and it is a distance the contract is designed not to measure.

Understanding what you actually owe, rather than what the agreement says you purchased, is the first step toward determining whether the contract can be challenged. That determination begins with a conversation.