Revenue-based financing and merchant cash advances are priced with a factor rate — a simple multiplier. Borrow $100,000 at a 1.25 factor and you repay $125,000. No compounding, no amortization schedule, no rate that changes with time.
That simplicity is also why owners get confused comparing it to a bank loan quoted in APR.
The conversion
The cost in dollars is fixed, but the effective APR depends entirely on how fast you repay:
| Repayment period | $100K at 1.25 factor | Approx. effective APR |
|---|---|---|
| 6 months | $25,000 cost | ~85% |
| 12 months | $25,000 cost | ~45% |
| 18 months | $25,000 cost | ~30% |
The same product gets “cheaper” in APR terms the longer it runs — the opposite of a loan, where longer terms mean more interest paid.
Why the APR comparison misleads in both directions
Against the financing: if a bank line at 12% APR is genuinely available to you at the size and speed you need, it is almost always cheaper. Factor-rate products are not competing on price.
For the financing: APR assumes the alternative is “the same money, cheaper.” Often the real alternative is no money in time — a missed inventory buy, a lost acquisition, a contract you can’t mobilize. The right comparison is the return on what the capital lets you do, minus the fixed dollar cost. A distributor who turns $100K into $160K of landed-and-sold inventory in four months doesn’t care that the effective APR was 80%; they care that they netted $35K they otherwise wouldn’t have.
The three questions that matter more than the rate
- What is the total dollar cost, and is there a discount for early payoff? Some funders discount the remaining factor if you repay early; many don’t. Ask before signing.
- Is the remittance fixed or a percentage of receipts? True revenue-based structures flex down when your sales dip — a meaningful protection that a fixed daily debit doesn’t give you.
- What’s the renewal trap? Refinancing an advance with a bigger advance (“stacking” or serial renewals) is where costs compound dangerously. A one-time bridge with a defined purpose is a tool; a treadmill is a problem.
Bottom line
Factor-rate financing is expensive money that is fast, accessible, and sized on your receipts rather than your collateral. It is the right tool when speed or accessibility is the binding constraint and the use of funds has a return — and the wrong tool for plugging a structural loss. Know the dollar cost, know your exit, and never let the APR conversion alone make the decision in either direction.