A café owner in Kitchener signs for a $50,000 advance, and the contract says 1.25. Not 25 percent, not an interest rate, not a term. Just a multiplier. Six months later she has repaid $62,500 and still can't say what rate she paid. That gap between the number on the page and the cost in real life is the whole factor rate vs APR problem.
A factor rate is a fixed multiplier applied to the amount you're advanced. Multiply the advance by the factor rate and you get the total you repay. APR is an annualized cost that depends on how long repayment takes. The same 1.25 factor rate works out to roughly 46% APR if you repay over 12 months and roughly 92% if you repay in six. The multiplier never changes. The speed does.
Below is the math, a three-step conversion you can run on any offer, where Canada's 35% criminal interest rate cap fits, and when a merchant cash advance from a Canadian alternative lender is still the right tool for the job.
What a factor rate is and how the math works
A merchant cash advance is structured as a purchase of your future receivables, not a loan. The provider advances you a lump sum today and collects a fixed total back, either as a percentage of your daily card deposits (called a holdback) or as a fixed daily or weekly debit from your business account. Because it isn't a loan on paper, it isn't priced like one. You get a factor rate instead of an interest rate.
The arithmetic is simple. Take the advance, multiply by the factor rate, and that's your total repayment. On a $50,000 advance at 1.25, you repay $62,500. The cost of the money is $12,500, fixed on the day you sign. That figure is an illustration of the math, not a quote, and the numbers on any real offer will be different.
The part that catches most owners is this. That $12,500 doesn't shrink if you repay faster. With a bank term loan, interest accrues on a declining balance, so paying it down early saves you money. With a factor rate, the cost was locked in on day one. Pay it back in four months or fourteen and the provider still collects $62,500, unless your contract includes a prepayment discount (some do, most don't advertise it).
So a factor rate answers one question well: how much will I pay back in total? It's silent on the question that actually matters for comparing offers: what does this cost me per year? Two owners can sign the same 1.25 and pay wildly different annual rates. The one whose sales are strongest pays the most, because strong sales speed up the holdback, and speed is what drives the APR.
How to convert a factor rate to an APR in 3 steps
You don't need a finance degree for this. You need your bank statements and a calculator. Call it the 3-Step Factor Rate to APR Conversion, and run it on every merchant cash advance offer before you sign.
- Find the total cost. Advance multiplied by factor rate, minus the advance. $50,000 × 1.25 = $62,500. Subtract $50,000 and your cost is $12,500.
- Estimate your payback period. Divide the total repayment by your expected daily remittance. If you average $1,650 a day in card deposits and the holdback is 15%, the provider takes about $248 a day. $62,500 ÷ $248 is roughly 252 business days, or about 12 months. This is the step most owners skip, and it's the one that sets the price.
- Annualize it. $12,500 on $50,000 is 25% over 12 months, which sounds like 25% APR. It isn't. You're paying the balance down from the first week while the fee stays fixed, so the equivalent APR is roughly 46%. Cut the payback to six months and the same 1.25 becomes roughly 92% APR. Nine months lands near 62%.
What does that mean in practice? The factor rate is the same in every scenario. The only thing that changed was how fast the money went back. A busy December that you're proud of will push your effective rate up, not down. That's the opposite of how every other form of credit behaves, and it's why the payback estimate deserves more attention than the multiplier.
Step 2 also explains why any serious provider reads your deposits before quoting. Daily card volume, seasonality and the gap between your best month and your worst all set the holdback and the term. If you want to know what a lender is actually reading, our guide to what Canadian lenders look for in your bank statements walks through it line by line.
Honestly, any provider that won't put the APR equivalent in writing beside the factor rate is hiding the one number you'd care about. Ask for it. A straight answer takes them thirty seconds.
Where Canada's 35% interest rate cap fits in
Since January 1, 2025, section 347 of the Criminal Code has defined Canada's criminal rate of interest as an annual percentage rate above 35% on credit advanced. The regulations that brought the change into force, the Criminal Interest Rate Regulations (SOR/2024-114), also carve out commercial lending: a loan to a business for business purposes of more than $10,000 and up to $500,000 can carry an APR of up to 48%, and loans above $500,000 are exempt from the cap altogether. Under the Code, "interest" is defined broadly, so fees, commissions and charges tied to the credit count toward that percentage, not just the stated rate. Our breakdown of the maximum legal interest rate in Canada covers the thresholds in detail.
So does the cap apply to a merchant cash advance? Most MCA contracts are written as a purchase of future receivables, and providers take the position that no credit is advanced, so the criminal rate doesn't apply. Courts look at substance over labels. An arrangement with a fixed daily debit, hard default triggers and a personal guarantee looks a lot like a loan, whatever the heading says. The 35% threshold is recent and case law is still developing, so nobody can tell you exactly where the line sits for a given contract. That's a question for a lawyer, not a blog.
The practical takeaway is simple. Run the 3-step conversion and set the APR equivalent beside the 48% commercial ceiling. If your offer converts to something well above that figure, you now know what the factor rate was doing for the provider. And unlike a variable-rate line of credit, a factor rate doesn't move when the Bank of Canada changes its policy rate, so the number you calculate on signing day is the number you live with.
When a merchant cash advance still makes sense
None of this means an MCA is a bad product. It means it's a specific product, priced for speed and flexibility rather than for cheapness, and it belongs in a specific set of situations. This is how it stacks up against the two products it's most often compared with.
| Feature | Merchant cash advance | Business term loan | Business line of credit |
|---|---|---|---|
| How cost is quoted | Factor rate (fixed multiplier) | Interest rate (APR) | Variable interest rate on the drawn balance |
| Repayment | Percentage of daily deposits or fixed daily/weekly debit | Fixed monthly payments over a set term | Interest-only or minimum payments, revolving |
| Cost if you repay early | Usually unchanged (fee fixed at signing) | Lower (interest stops accruing) | Lower (interest stops accruing) |
| Speed to fund | Days, for approved files | Weeks at a bank, days with an alternative lender | Weeks at a bank |
| What the underwriting weighs | Deposit volume and consistency | Credit score, financials, time in business | Credit score, financials, collateral |
| Best fit | Short-term need with a clear return, uneven or seasonal sales | Planned purchase with a long payback | Recurring cash flow gaps |
An MCA earns its cost when three things line up. The need is short-term: inventory before your busy season, a broken walk-in cooler, a supplier deposit that clears the way for a bigger order. The return is clear and arrives inside the payback window. And a bank has already said no, or can't say yes quickly enough to matter. Restaurants are the classic case, which is why we wrote a separate guide on how Canadian restaurant owners actually get funded.
It stops making sense when the payback runs longer than the benefit, when margins are too thin to absorb a daily holdback, and above all when it's stacked. Taking a second advance to service the first is how a manageable cost turns into a spiral, and it's the pattern behind most of the horror stories. If you've just been turned down and you're weighing options, read what to do after a business loan decline before you sign anything.
Solid Capital is a Canadian alternative lender, and we underwrite the way this article suggests you should read an offer, from the full file. We look at your bank statements, your revenue pattern and the context of your business, not just your credit score, which is how many owners the banks passed on get approved with us, and funded within 24 hours for approved files. If you've been declined or under-served and want an honest read on whether an advance, a term loan or a line of credit fits, start an application at solidcapital.ca. Five minutes, no impact to your credit to apply, and a Canadian advisor reviews every file personally.
The multiplier is simple. The speed is the cost. Ask for both numbers, in writing, before you sign.
Frequently Asked Questions
What is a good factor rate for a merchant cash advance in Canada?
There is no single good number, because the factor rate alone doesn't tell you what the money costs. A 1.25 repaid over 12 months and a 1.25 repaid over six months are the same multiplier but very different annual rates. Judge an offer by its APR equivalent and payback period, and get both in writing.
Is a factor rate the same as an interest rate?
No. An interest rate is an annual percentage charged on a declining balance, so the cost falls as you pay down the debt. A factor rate is a fixed multiplier applied once to the advance, so the total cost is set on signing day and doesn't change with time or balance.
How do I calculate the APR on a merchant cash advance?
Multiply the advance by the factor rate and subtract the advance to get the total cost. Divide the total repayment by your expected daily remittance to estimate the payback period. Then annualize: because the balance falls while the fee stays fixed, a 25% cost over 12 months works out to roughly 46% APR, and the same cost over six months is roughly 92%.
Does paying off a merchant cash advance early save money?
Usually not. The fee is fixed when you sign, so repaying in four months or fourteen typically costs the same total. Some providers offer a prepayment discount, but you have to ask for it and it should be written into the contract.
Are merchant cash advances subject to Canada's 35% criminal interest rate?
It depends on how the contract is structured. MCAs are written as a purchase of future receivables, and providers take the position that section 347 of the Criminal Code doesn't apply because no credit is advanced. Courts look at substance rather than labels, the 35% threshold only took effect in January 2025, and case law is still developing, so a specific contract is a question for a lawyer.
