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.