Start with the basic calculation
Multiply the amount advanced or financed by the factor rate. The result is the base amount to be paid or delivered before separately disclosed fees.
Base cost: $50,000 − $40,000 = $10,000
The 1.25 figure is not “25% APR.” It expresses a fixed relationship between the starting amount and the base obligation. The time over which that obligation is paid is essential to any annualized comparison.
Net proceeds can differ from the starting amount
A funder may deduct an origination, underwriting, administrative, or other fee before delivering funds. An existing obligation may also be paid directly from the proceeds. That means you could receive less cash than the amount used in the factor calculation.
For example, if a hypothetical $1,000 fee is deducted from a $40,000 advance, the business receives $39,000 while the base purchased amount remains $50,000. The economic cost relative to usable cash is therefore $11,000, before any other charges.
Request the exact net cash to your business and the total dollar obligation under the agreement. Keep them side by side when comparing offers.
Why the factor rate is not an interest rate
Interest commonly accrues on outstanding principal over time. A factor-based obligation is generally determined at inception. Paying sooner may not reduce that fixed amount unless the agreement expressly provides a discount.
APR is an annualized measure intended to help compare certain credit costs. A merchant cash advance structured as a purchase of receivables is not a traditional loan, and an APR may not be presented in the same way. When an APR or estimated APR is disclosed, examine the assumptions about payment amounts and duration. When it is not, you can still compare total dollars, time, and cash-flow impact.
Duration changes the economic comparison
Two offers can have the same factor rate and very different payment schedules. A shorter duration concentrates the obligation into a smaller window and generally raises the periodic payment. A longer duration lowers the payment but may involve different fees or terms.
Do not infer that a lower factor is automatically the better offer. Compare the factor, every fee, the actual payment frequency, expected term, and the conditions under which payments may change. A modest difference in dollar cost can be outweighed by a payment schedule the business cannot comfortably support.
Early payoff and renewals require special attention
With a traditional amortizing loan, early principal payment can reduce future interest, subject to any prepayment charge. With a fixed factor-based obligation, the total may remain unchanged even if the business pays early. Some agreements offer a stated early-payment discount; read the eligibility conditions and expiration date.
A renewal can also obscure cost. If a new advance pays off an old one, identify how much new cash you receive, how much of the prior obligation remains, and whether any unpaid fixed cost is carried into the new purchased amount. Compare the combined obligations rather than looking only at the new factor rate.
A five-line comparison you can reuse
- Net proceeds: cash available for the intended business purpose.
- Total obligation: base purchased or repayment amount plus every charge.
- Payment burden: amount and frequency under the agreement.
- Expected duration: number of payments and any assumptions behind it.
- Flexibility: reconciliation, early-payment, renewal, and default provisions.
Use our payment calculator to model illustrative daily or weekly payments, then read the full comparison checklist before accepting an offer.