When you research business funding options you will encounter two very different cost structures — factor rates and interest rates. Understanding the difference is critical to making the right financing decision for your business.
Here is a plain-English breakdown of how each works, how to calculate your real cost, and how to compare them accurately.
What is an Interest Rate?
An interest rate is a percentage of your outstanding loan balance charged over time. The longer you take to repay the loan, the more interest you pay. Interest rates are typically expressed as an annual percentage rate — APR.
For example, a $100,000 loan at 25% APR over 12 months would cost approximately $13,700 in interest. The same loan paid over 24 months would cost approximately $28,000 in total interest. Time is the key variable — the longer the term, the higher the total cost.
What is a Factor Rate?
A factor rate is a fixed multiplier applied to your funding amount at the time of origination. It does not change over time. Your total repayment is calculated on day one and stays fixed regardless of how quickly or slowly you repay.
Factor rates are expressed as decimals — typically between 1.15 and 1.49 for merchant cash advances. The formula is simple: Funding Amount × Factor Rate = Total Repayment.
Factor Rate Calculation Examples
$50,000 at 1.20 = $60,000 total repayment ($10,000 cost). $50,000 at 1.28 = $64,000 ($14,000 cost). $50,000 at 1.35 = $67,500 ($17,500 cost).
$100,000 at 1.20 = $120,000 ($20,000 cost). $100,000 at 1.28 = $128,000 ($28,000 cost). $100,000 at 1.35 = $135,000 ($35,000 cost).
$250,000 at 1.20 = $300,000 ($50,000 cost). $250,000 at 1.28 = $320,000 ($70,000 cost). $250,000 at 1.35 = $337,500 ($87,500 cost).
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Apply NowHow to Compare Factor Rates to APR
Comparing a factor rate to an APR is not straightforward because factor rates are fixed while interest rates are time-dependent. However you can calculate an approximate APR equivalent for comparison purposes.
For a $100,000 MCA at a 1.28 factor rate repaid over 12 months, the total cost of capital is $28,000. Expressed as an APR this is approximately 56% — significantly higher than a traditional bank loan.
However this comparison has an important caveat: MCA funding approves businesses that banks often decline, funds in 24 hours instead of 60 days, and requires no collateral. The premium in cost reflects the premium in speed, accessibility, and flexibility.
What Determines Your Factor Rate?
At Workable Funding, your factor rate is determined by the overall strength of your business profile including your monthly revenue, consistency of deposits, average daily balance, personal credit score, time in business, and any existing business debt obligations. Stronger profiles qualify for lower factor rates.
The best way to understand your actual cost is to apply and receive a real offer from Workable Funding. Our specialists will walk you through every number clearly before you make any decision. Apply in 2 minutes with no impact to your credit.
Written by the Workable Funding Team · New York, NY