Mesaside Advances, a small-business funding broker in Cheyenne, Wyoming, explains the difference between an interest rate, an APR and a factor rate. An interest rate prices borrowing over time, an APR folds certain fees into a yearly figure, and a factor fixes a merchant cash advance's total at signing. The fair comparison uses dollars and time. MCAs are not loans.
| Interest rate | The yearly price of borrowing, charged on the balance owed |
|---|---|
| APR | A yearly figure that includes the interest rate and certain fees |
| Factor | A multiplier fixed at signing; sets an MCA's total to be delivered |
| Fair comparison | Net proceeds, total paid or delivered, and time |
| MCA | Not a loan; its factor is not an interest rate |
What is an interest rate?
An interest rate is the yearly price of borrowing, charged on the balance you still owe. On an amortizing loan the balance falls with each payment, so the interest in each payment falls too. The rate alone leaves out fees, which is why two loans with the same rate can cost different amounts.
What is an APR?
An annual percentage rate expresses the cost of credit as a yearly figure that includes the interest rate and certain fees. Its purpose is comparison: two offers with the same APR cost about the same per year, even if one has a lower rate and higher fees. Not every business funding offer comes with an APR.
What is a factor rate?
A factor is a multiplier used mostly with merchant cash advances. The funder multiplies the advance by the factor once, at signing, and the result is the total the business agrees to deliver. Nothing about the factor depends on time: the total is the same whether it is delivered in four months or fourteen. A merchant cash advance is not a loan, and its factor is not an interest rate.
Factor rate vs. interest rate: why they cannot be compared directly
An interest rate is a price per year on a falling balance. A factor is a one-time price on the original amount. A factor's decimal part (the cost per dollar advanced) will almost always look smaller than an annualized cost of the same money, because it ignores how quickly the total is collected and that the business is handing back money from the first day.
An illustration with round numbers
These numbers are chosen for easy arithmetic. They are not typical prices, quotes or terms available to anyone.
- Advance: $10,000. Factor: 1.5. Total to deliver: $15,000. Cost: $5,000.
- If receipts deliver the $15,000 over twelve months, the business pays $5,000 for the use of money that is shrinking month by month.
- If stronger sales deliver it over six months, the cost is still $5,000, but for half the time. Per year, that is roughly twice as expensive.
The factor did not change; the time did. That is why a factor quoted on its own says little about how expensive an advance is compared with a loan.
Simple interest and amortizing interest
Two loans with the same rate can charge different interest depending on how it is calculated. On an amortizing loan, interest is charged on the balance still owed, which falls with every payment. On some short-term products, interest or a fixed fee is calculated once on the original amount and spread across the payments, so you pay it on money you have already returned. The second method costs more for the same quoted number. Ask an offer how interest is calculated, and check the payment schedule to see whether the interest portion falls over time.
APR vs. interest rate on a loan
For the same loan, the APR is usually higher than the interest rate because it includes fees. The gap is a quick signal of how much the fees add. When an offer gives only an interest rate, ask for every fee and add them yourself; business funding fees explained lists the usual ones.
How to compare offers fairly
- Write down the net proceeds: what reaches your account after fees.
- Write down the total you will pay back or deliver, including fees charged later.
- Subtract to get the total cost in dollars.
- Note how long you expect it to take, and how often payments or remittances are taken.
- Compare the cost per dollar and per month across offers, not the headline numbers.
The MCA cost comparison estimator works out an advance's total and remittance time, and the total cost of funding calculator does the same for a loan.
Approximating an APR for an advance
Any yearly figure for an advance depends on an assumption about how long remittance will take. If someone quotes one, ask what time period it assumes.
Where this fits
For how advances work, see merchant cash advances explained; for loans, business term loans. How a request moves explains our role, and more guides are in the resources section.
By Mesaside Advances · Updated
