Merchant cash advances and revenue-based advances are usually priced with a factor rate, not an interest rate — and the difference matters more than most business owners realize.
How a factor rate works
A factor rate is a simple multiplier. If you take a $50,000 advance at a factor rate of 1.30, you repay $50,000 × 1.30 = $65,000. The $15,000 gap is your cost of capital. Unlike an interest rate, it does not compound and it does not fall if you repay early — the total is fixed the moment you sign.
Why the APR-equivalent is higher than it looks
Because most advances are repaid over a short window (often 6 to 18 months) through frequent daily or weekly payments, the effective annual cost — the APR-equivalent — can be far higher than the factor rate suggests. A 1.30 factor over a short term can translate into a triple-digit APR. That is not necessarily a reason to avoid it: fast, flexible capital has real value. But you should compare it on equal footing with a term loan quoted in APR.
Do the translation before you sign
The single most useful thing you can do is convert the factor rate into an APR-equivalent and a total dollar cost, then weigh that against alternatives like a line of credit or term loan.
Translate a factor rate into total cost and an estimated APR with our business calculators, or see which options fit your business with Find Your Funding Fit.