A merchant cash advance priced at a 1.28 factor rate sounds cheaper than a loan at 28% APR. In some cases it is. In others, it costs more than twice as much when you run the actual numbers. The difference comes down to one thing: factor rates and interest rates are not the same calculation, and most Canadian business owners find out the hard way.
This guide explains exactly what a factor rate is, how to convert it into a cost you can compare, and when an MCA makes financial sense versus when a different product is a better call.
What a factor rate actually is
A factor rate is a multiplier applied to the total amount you receive. It is not a percentage charged over time. It is a fixed number that determines the total repayment from day one.
If you receive $50,000 at a factor rate of 1.30, you repay $65,000. Full stop. That $15,000 cost does not change whether you repay in 4 months or 12. There is no daily interest accruing. The obligation is set the moment the advance is funded.
Where factor rates come from
Factor rates on merchant cash advances in Canada typically range from 1.09 to 1.55, though you will occasionally see rates above that for high-risk profiles. The rate is set based on your monthly deposit volume, how long you have been in business, your industry risk profile, and your repayment history on any prior advances. A restaurant processing $80,000 per month with two years of history will see a meaningfully different rate than a startup six months in.
Why it is not an APR
Annual percentage rate (APR) is a time-weighted measure. It tells you the cost of borrowing as a percentage of the outstanding balance per year. A factor rate tells you none of that. It is agnostic to time. Two MCAs with identical factor rates can have dramatically different APR equivalents depending on repayment speed. A 1.30 factor rate repaid over 4 months has a much higher effective APR than the same rate repaid over 14 months, even though the dollar cost is identical.
Why lenders use factor rates
Factor rates make the cost of an MCA simple to communicate. For the lender, they also reflect the actual risk model: since repayment is a percentage of daily deposits rather than a fixed payment, the lender's return depends on the velocity of your revenue, not calendar time. A fixed multiplier accounts for that variable repayment structure in a way a traditional interest rate cannot.
How to calculate what you actually owe
The calculation is straightforward. The context around it is where most borrowers get tripped up.
Step 1: Total repayment
Multiply the advance amount by the factor rate.
$50,000 x 1.30 = $65,000 total repayment
The $15,000 difference is the cost of the advance. No additional interest accrues on top.
Step 2: Holdback and estimated repayment period
Your daily or weekly repayment is calculated as a percentage of your deposits, typically 10% to 20%. This is called the holdback rate or retrieval rate. Lenders set it based on your monthly volume so repayment projects to complete within a window, usually 4 to 18 months.
If your monthly deposits average $40,000 and the holdback is 15%, roughly $6,000 per month goes toward repayment. A $65,000 total obligation takes approximately 11 months at that pace.
Step 3: Convert to approximate APR for comparison
To compare the MCA cost against a term loan or line of credit, convert using this approximation:
APR estimate = (Factor rate - 1) / (Estimated repayment months / 12)
Using the example: (1.30 - 1) / (11/12) = 0.30 / 0.917 = approximately 33% APR
For 6-month repayment at the same factor rate: (1.30 - 1) / (6/12) = 60% APR
Same dollar cost. Two very different annualized rates. This is why repayment speed matters when comparing products, and why factor rates without repayment period estimates are incomplete information.
When an MCA makes sense and when it does not
Factor rates above 1.20 look expensive on an APR basis. That calculation is correct. It does not make the product wrong for every situation.
When the math works in your favour
An MCA makes sense when the revenue you generate from the funded activity outpaces the cost of capital. A restaurant that uses a $40,000 advance to add a delivery operation and increase monthly revenue by $15,000 has earned back the cost of a 1.30 factor rate within the repayment window. A retailer who buys inventory at a discount before peak season and sells through in 90 days has effectively borrowed at a low annualized cost by compressing the repayment timeline.
When the math works against you
An MCA is expensive capital for businesses using it to cover operating shortfalls without changing the underlying cash flow problem. If your monthly deposits are flat and you are borrowing to pay suppliers, payroll, or rent, the holdback will compound the pressure rather than relieve it. Repaying 15% of daily deposits during a slow stretch can leave you short exactly when you need liquidity most. In those situations, a different financing structure is usually a better fit.
Comparing factor rates across offers
When you receive multiple MCA offers, compare on three variables: the factor rate, the total repayment amount, and the holdback percentage. A lower factor rate with a high holdback can create more cash flow strain than a slightly higher factor rate with a lower holdback. What you repay and how fast you repay it are both part of the cost picture.
Stacking advances
If you already have an active MCA and are considering a second one from a different lender, the combined holdback can reach 30% or more of your daily deposits. Most experienced advisors recommend against stacking unless the revenue opportunity is substantial and well-defined. The compounding cash flow constraint is real and recoveries are difficult once you are in it.
Factor rate vs interest rate: the full comparison
Comparing an MCA to a term loan requires converting both to a common unit. Here is how they stack up in practice.
| Feature | Merchant Cash Advance | Term Loan |
|---|---|---|
| Cost expression | Factor rate (e.g. 1.25) | Annual interest rate (e.g. 14%) |
| Total repayment | Fixed from day one | Depends on rate + term |
| Repayment structure | % of daily/weekly deposits | Fixed monthly payment |
| Early repayment savings | None (total is fixed) | Yes, less interest accrues |
| Revenue slowdown impact | Payments slow with deposits | Fixed payment regardless |
| Approval speed | Often same-day to 48 hours | Days to weeks |
| Credit score weight | Low (revenue drives approval) | High (primary factor) |
The key structural difference: if revenue slows, your MCA payments slow with it. A term loan does not flex. The payment is fixed regardless of what your deposits are doing that month. For businesses with seasonal or unpredictable revenue, that flexibility has real value the raw APR comparison does not capture.
If you have received an MCA offer and want to know whether the factor rate is competitive or whether a term loan would cost less for your situation, Solid Capital's advisors review every file personally. Talk to an advisor at solidcapital.ca. It is a five-minute conversation that costs nothing. You can also compare business financing options on our site, or start an application with no credit impact to apply.
Frequently Asked Questions
What is a typical factor rate for a merchant cash advance in Canada?
Factor rates on Canadian MCAs typically range from 1.09 to 1.55. Where your rate lands depends on your monthly deposit volume, time in business, industry, and repayment history on any prior advances. Established businesses with consistent deposit patterns usually qualify for rates at the lower end of that range.
Is a factor rate the same as an interest rate?
No. An interest rate is a time-based percentage charged on the outstanding balance. A factor rate is a fixed multiplier applied to the total advance. The cost is the same regardless of how quickly you repay. Direct comparisons between MCAs and loans require converting the factor rate into an estimated APR using the projected repayment period.
Can I pay off a merchant cash advance early to save money?
In most cases, no. The total repayment is determined by the factor rate at funding. Early repayment does not reduce the total owed. It simply accelerates the timeline. Some MCA agreements include early settlement discounts, but these are not standard. Always check your specific agreement before assuming early payoff generates savings.
How does the holdback rate affect my cash flow?
The holdback rate is the percentage of your daily or weekly deposits that goes toward repayment. A 15% holdback on $40,000 in monthly deposits takes approximately $6,000 per month off your available cash. The holdback is designed to be manageable based on your deposit history, but if revenue drops significantly, that percentage can still create real pressure.
What factor rate should I look for when comparing MCA offers?
Compare on factor rate, total repayment amount, and holdback percentage together. A 1.22 factor rate with a 20% holdback may put more strain on your daily cash flow than a 1.28 rate with a 12% holdback, even though the first offer looks cheaper on paper. Run the full calculation for each offer using your actual monthly deposit average.
