A factor rate is a decimal you multiply against the amount advanced to get the total you’ll pay back; the cost is fixed the day you sign. An interest rate is a percentage charged on the balance you still owe, so the cost falls as you pay the balance down and rises if you take longer. The same factor rate costs more per dollar on a short term than a long one, and paying early usually doesn’t lower it unless the contract says so.
What is a factor rate?
A factor rate is the price of an advance written as a multiplier. NerdWallet’s factor-rate explainer (updated May 2026) gives the formula plainly: funding amount times factor rate equals the total amount owed. The rate is a decimal a little above one, it applies only to the original amount, and it doesn’t change while you repay. NerdWallet says factor rates typically range from 1.1 to 1.5; Bankrate’s explainer (August 2025) puts the range at 1.10 to 2. Where any particular offer lands inside a range like that depends on the funder, the product, and the file.
Factor rates show up on merchant cash advances, revenue-based financing, and short-term products from online funders, where the money is a purchase of future receipts rather than a loan. There’s no interest accruing day by day, just a fixed dollar cost, and the factor rate is a compact way of writing it.
How is an interest rate different?
An interest rate is charged on the balance that’s still outstanding, and that balance changes. Bankrate puts it simply: as your balance decreases, the amount of interest you pay decreases as well. A factor rate is applied once, to the whole amount, at the start. That single difference drives everything else on this page.
APR is a third thing: the yearly cost of the money, fees included, expressed as a percentage, so two offers with different shapes can be set side by side. A factor-rate contract has no interest rate, but it can still be given an estimated APR, and the state disclosure rules below require one.
| Factor rate | Interest rate | APR | |
|---|---|---|---|
| What it measures | Total payback as a multiple of the amount advanced | The charge on the balance still owed, over time | The yearly cost of the money, fees included |
| How it is quoted | A decimal a little above one | A percentage per year (sometimes per month) | A percentage per year |
| Whether time changes the cost | No. The dollar cost is fixed at signing, whatever the term | Yes. A shorter payoff means less interest; a longer one means more | Yes. The same dollar cost over a shorter term produces a higher APR |
| Where you will see it | Merchant cash advances, revenue-based financing, short-term online products | Bank loans, lines of credit, equipment loans, credit cards | Bank and card disclosures, and on commercial offers in states that require it |
The math, side by side
The numbers below are made up to show the math — they are not Aglet’s pricing and not an offer. Say a funder advances $10,000 at a factor rate of 1.30. Total payback is $10,000 times 1.30, or $13,000. The cost is $3,000, and it’s $3,000 whether you repay in six months or twelve.
Now take the same made-up $10,000 as a loan at a 20% yearly interest rate, repaid in twelve equal monthly payments. Simple arithmetic says 20% of $10,000 is $2,000. But interest is charged on the balance that’s left, and that balance shrinks with every payment, so the interest actually comes to about $1,100. That gap is the whole difference between the two kinds of rate: the factor rate charges on the full amount for the full term, and the interest rate charges only on what’s still out.
One more made-up step shows why the term matters. That $3,000 on $10,000 over twelve months is thirty cents on the dollar for a year. Repay it in six months and it’s still thirty cents on the dollar, but you had the money half as long, so the yearly pace is roughly double. A modest-looking factor rate can carry a high APR simply because the term is short.
Why time matters with a factor rate
The same rate costs more per dollar on a short term
Because the dollar cost is fixed, the shorter the term, the faster you’re paying it. Two offers with the same factor rate cost the same dollars whether one is collected daily over a few months and the other monthly over a much longer stretch; the short one just costs them far faster. That’s why the disclosure laws insist on an estimated APR next to the factor rate: the APR carries the term inside it, and the factor rate doesn’t.
Paying early usually doesn’t lower it
With an interest rate, paying early saves money because there’s less balance left to charge on. With a factor rate, the cost was set on day one, so paying early just means you paid the same dollars sooner. Bankrate says it flatly: you will be responsible for paying the entire factor rate fee even if you pay off the loan early. Some contracts include an early-payoff discount, and it’s worth asking for one, but unless it’s written in it doesn’t exist. New York’s disclosure rule has a required line for exactly this case: if paying off faster than required still leaves you owing all or part of the finance charge, the provider must say so on the offer.
What must a provider show you?
In New York and California the company making you a specific offer must put the cost in a standard form; the duty is on the provider, and the rules cover commercial financing, not consumer credit. New York’s Department of Financial Services regulation, 23 NYCRR Part 600, requires a sales-based financing offer of $2,500,000 or less to show, in a fixed table, the funding provided, an estimated APR, the finance charge in dollars, the estimated total payment amount, the estimated payment and its frequency, the payment terms, the estimated term, two lines on prepayment, and any collateral requirements. When no part of the cost is interest, the table must also say, in the regulation’s words, “APR is not an interest rate. The cost of this financing is based upon fees charged by [financer] rather than interest that accrues over time.”
California’s Department of Financial Protection and Innovation announced in June 2022 that its commercial financing disclosure regulations would take effect on December 9, 2022, and that they reach providers of installment loans, open-end credit, commercial factoring, and merchant cash advances. Providers must disclose the amount of funding, the annual percentage rate calculated for the transaction, a payment amount where there is one, the term, details of prepayment policies, and, for products without a monthly payment, an average monthly cost. Other states have since passed their own versions. If your offer doesn’t come with a table like this, ask for one; a desk that won’t produce it is telling you something.
Questions to ask before you sign
Ask for the answers in dollars, in writing, before the signature page. The Federal Reserve Banks’ 2026 Report on Employer Firms found that sixty percent of firms that borrowed from online lenders said their actual borrowing costs were higher than expected, and that high interest rates and unfavorable repayment terms were the most common challenges at online lenders. Most of that surprise is avoidable with this list:
- Total payback. The funding amount, the total you’ll repay, and the difference in dollars.
- Remittance amount and frequency. How much, how often, and whether it’s a fixed amount or a percentage of receipts.
- Term. The estimated term, and what assumptions about your revenue it rests on.
- Prepayment terms. Whether paying early reduces the cost, and by how much, in writing.
- Fees outside the factor rate. Origination, underwriting, ACH, wire, or renewal fees, and whether they come out of the funding before it reaches you.
- The slow month. Whether the payment flexes, and if not, whether there’s a true-up clause and how to trigger it.
If a bank can fund the file in time, take the bank. A factor-rate product buys speed and flexibility, and the cost of both should be visible before you sign, not after.
Where Aglet fits
Whichever of our programs fits a file, the cost is shown the way this guide says it should be: in dollars, before you sign. Rates can start around 1% a month for the strongest files, depending on the file — a floor the strongest files might reach, not a rate anyone is quoted here. Terms run out to 48 months at the ceiling — most files land 12–24 — and programs typically range up to 2X monthly revenue, depending on how the file looks. These are illustrative ranges; the review desk’s read of your actual file is the answer, and you’ll see the full cost in plain terms before you sign anything.
We’re not the cheapest desk. Files that fit usually leave with a longer term and one payment instead of three — and you’ll know exactly what it costs before you sign anything. If a bank can fund your file in time, take it. If you’re weighing a flexible payment against a fixed one, the guide to revenue-based financing vs. a merchant cash advance walks through it, the revenue-based financing and working capital pages cover the programs, and how it works shows the three steps from a two-minute form to a plain answer.
Sources
- New York State Department of Financial Services, 23 NYCRR Part 600 (Commercial Finance Disclosure Law regulation) — The ten-row sales-based financing disclosure table, the $2,500,000 threshold, the ‘APR is not an interest rate’ line, and the required prepayment statements
- California Department of Financial Protection and Innovation, press release on the commercial financing disclosure regulations (June 14, 2022) — Regulations effective December 9, 2022; covered providers include merchant cash advances and factoring; disclosures include APR, payment amount, term, prepayment details and an average monthly cost
- NerdWallet, What Is a Factor Rate and How Do You Calculate It? (updated May 2026) — Funding amount times factor rate equals total owed; decimals applied only to the original amount; typical range of 1.1 to 1.5
- Bankrate, What is a factor rate and how to calculate it (August 2025) — Interest falls as the balance falls; the full factor-rate fee is owed even on early payoff; typical range of 1.10 to 2
- Federal Reserve Banks, 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey — Sixty percent of online-lender borrowers said actual borrowing costs were higher than expected; high interest rates and unfavorable repayment terms were the most common challenges