A factor rate of 1.35 sounds harmless until you do the math. On a $50,000 merchant cash advance, that number means you are repaying $67,500 total. Not over a year. Over whatever term your advance runs. The annualized cost often surprises business owners who agreed to the product without understanding what 1.35 actually means.
Factor rates are not interest rates. That distinction matters. Most Canadian business owners who take a merchant cash advance do not fully understand what they signed until the daily repayments hit their account.
This guide explains exactly what a factor rate is, how to calculate the real cost of an MCA, and how to compare it honestly against other business financing options.
What is a factor rate?
A factor rate is a multiplier applied to the advance amount to determine the total repayment. It is expressed as a decimal, typically between 1.1 and 1.5 for Canadian MCA products.
The formula is simple: advance amount multiplied by the factor rate equals total repayment.
| Advance | Factor Rate | Total Repayment | Total Cost |
|---|---|---|---|
| $25,000 | 1.20 | $30,000 | $5,000 |
| $50,000 | 1.35 | $67,500 | $17,500 |
| $100,000 | 1.45 | $145,000 | $45,000 |
The factor rate is fixed at the time of the agreement. Unlike a traditional loan with an interest rate, it does not decrease if you repay early. The total repayment amount is locked in from day one.
This is one of the most important structural differences between an MCA and a bank loan. Paying off a bank loan early reduces your total interest cost. Paying off an MCA early does not reduce the total repayment unless your agreement includes a prepayment discount. Some do. Most do not.
How MCA repayments actually work
Merchant cash advances are repaid through a fixed percentage of your daily or weekly business deposits, called a holdback rate. The holdback is typically 10% to 20% of gross daily deposits.
A practical example
A restaurant in Hamilton takes a $40,000 advance with a factor rate of 1.30 and a 15% daily holdback. Total repayment is $52,000. On a day the restaurant deposits $4,000 from card receipts, the MCA provider collects $600. On a slow day with $1,500 in deposits, the collection is $225.
The advance has no fixed end date. Repayment slows when revenue slows and accelerates when revenue is strong. This is the core feature that distinguishes an MCA from a term loan with a fixed monthly payment.
What this means for your cash flow
The holdback comes out of every deposit, every day. On strong revenue days, the dollar amount is higher. On slow days, lower. Your cash flow is never completely predictable during the advance period, which is why businesses with thin margins need to model this carefully before signing.
The Financial Consumer Agency of Canada recommends that borrowers fully understand the cost and repayment structure of any financing product before signing. With an MCA, that means understanding both the factor rate and the holdback percentage.
Factor rate vs. APR: why the comparison is complicated
Many MCA providers do not quote an annual percentage rate (APR). This creates a transparency gap that has drawn regulatory attention in Canada.
How to convert a factor rate to an approximate APR
You need to know the estimated repayment term. The calculation works like this: multiply the advance by the factor rate minus one to get total cost. Divide that by the advance amount to get the cost as a decimal. Divide by the estimated term in years. Multiply by 100 for the APR.
Example: $50,000 advance, factor rate 1.35, estimated 8-month term. Total cost is $17,500. Cost as decimal: 0.35. Annualized: 0.35 divided by 0.667 equals 0.525. APR: approximately 52.5%.
Why the APR swings so much
The same factor rate on a 4-month term produces an APR over 100%. On a 14-month term, that same rate falls below 30%. The APR changes dramatically based on how quickly you repay. This is why factor rates and APRs are not directly comparable without knowing the actual repayment timeline.
Under section 347 of the Criminal Code of Canada, lenders cannot charge effective annual interest rates above 60%. MCA providers structure advances as a purchase of future receivables, not a loan, which places them outside some traditional interest rate regulations. The Financial Consumer Agency of Canada has flagged this structure as an area of ongoing regulatory review.
When a merchant cash advance makes sense
An MCA is not the right product for every situation. It is the right product for specific ones.
When an MCA tends to work well
Your business has strong, consistent daily card or deposit volume. You need capital in 24 to 48 hours. You cannot qualify for a bank term loan due to credit or documentation. Your repayment capacity fluctuates with revenue and a flexible structure suits you better than a fixed monthly payment. Or you need a shorter-term bridge while you build your credit file.
When an MCA is a harder fit
Your revenue is lumpy or project-based (the holdback structure works against you in slow months). You want to pay off early to reduce cost (factor rates are fixed regardless). Your margins are very thin (daily holdbacks reduce cash flow on every deposit). Or you need an amount above $500,000.
Making the right call for your business
The most useful thing you can do before signing is calculate the full repayment amount and compare it to what the capital will actually generate for your business. If the return on deploying the capital exceeds the factor cost, the product makes sense. If it does not, it is worth exploring other business financing options first.
Solid Capital offers merchant cash advances to Canadian businesses with consistent deposit volume. Every file is reviewed by a Canadian advisor who reads the full picture. Curious whether you would qualify? Apply at solidcapital.ca. Five-minute form, no impact to your credit score to apply. See how our process works before you decide.
Frequently Asked Questions
What is a typical factor rate for a merchant cash advance in Canada?
Factor rates in Canada typically range from 1.10 to 1.50. The rate you receive depends on your industry, monthly deposit volume, time in business, and credit profile. Businesses with stronger revenue histories and better credit tend to receive lower factor rates.
Can I pay off a merchant cash advance early to save money?
In most MCA agreements, early repayment does not reduce the total amount owed. The factor rate is applied to the full advance upfront. Some agreements include an early repayment discount, so it is worth asking your provider before signing.
How does a merchant cash advance affect my credit score?
Applying for an MCA with most alternative lenders involves a soft credit pull that does not affect your score. MCA repayments are typically not reported to credit bureaus like Equifax Canada or TransUnion, so on-time repayment usually does not build your credit history the way a bank loan would.
Is a merchant cash advance regulated in Canada?
MCAs are structured as a purchase of future receivables rather than a traditional loan, which places them outside some lending regulations. The Financial Consumer Agency of Canada and provincial regulators have been reviewing MCA practices. Borrowers should always read the full agreement and understand the total repayment amount before signing.
What is a holdback rate on a merchant cash advance?
The holdback rate is the percentage of your daily deposits that the MCA provider collects until the advance is repaid. Holdback rates typically range from 10% to 25%. A higher holdback rate means faster repayment but reduced daily cash flow.
