Factor Rate vs. Interest Rate: What You're Actually Paying
A factor rate and an interest rate are not the same thing, and confusing them is the most common way business owners misjudge the cost of working capital. Here's how to read each one.
Strategic Partnerships, PIRS Capital
If you've compared working capital to a bank loan and walked away confused, you're not alone. The two products quote their cost in fundamentally different units. A loan uses an interest rate; working capital uses a factor rate. Reading one as if it were the other will lead you to the wrong conclusion every time.
How an interest rate works
An interest rate is a percentage charged on your outstanding principal, accruing over time. Pay the loan off early and you stop accruing interest, so you pay less in total. The longer you hold the balance, the more it costs. Interest is a function of both rate and time.
How a factor rate works
A factor rate is a fixed decimal multiplier, usually somewhere between 1.10 and 1.49, set at the moment you're funded. Multiply your advance by the factor rate and you get the total amount of receivables you'll deliver. It does not accrue, and it does not change with time.
Why the distinction matters legally
A merchant cash advance is not a loan. It's a purchase of your future receivables at a discount. That's why it carries a factor rate rather than an interest rate, and it's the legal reason an advance sits outside most usury statutes. It also means concepts like amortization and APR don't map cleanly onto it, though several states now require funders to disclose an estimated APR equivalent so you can compare across products.
Reading the real cost
- Total cost of capital = (factor rate − 1) × advance amount. At a 1.30 rate on $100K, that's $30,000.
- Early payoff usually doesn't shrink that figure unless your agreement includes an early-delivery or prepayment discount. Ask before you sign.
- A shorter estimated term means a higher effective annualized cost, even though the dollar cost is unchanged. Speed has a price.
None of this makes an advance good or bad. It makes it different. The right question isn't 'is the rate low?' It's 'does this capital generate more than it costs, on a timeline that fits my cash flow?' That's a question about your business, not just the number on the term sheet.
About the author
Mitchell Ledven
Mitchell Ledven works in strategic partnerships at PIRS Capital, a direct lender that has provided short-duration bridge and working-capital financing to U.S. businesses since 2012, over $1B deployed to more than 100,000 businesses across all 50 states. He works directly with the owners and partners PIRS funds, and focuses on helping businesses solve the cash-flow timing problem that working capital is built for. Connect with Mitchell on LinkedIn: https://www.linkedin.com/in/mitchellpirs/
More about PIRS CapitalThis article is educational and illustrative. It isn't financial, legal, or tax advice. Terms and figures vary by business and by funder. Confirm specifics with a qualified advisor and read any agreement carefully before signing.