Factor rate vs. APR is the most expensive confusion in business financing. Most business owners shopping for capital run into two very different ways of pricing the same money. Banks quote an interest rate. A lot of alternative lenders quote a factor rate. They look similar. They are not, and confusing them is the single most expensive mistake we see owners make.
What a factor rate is
A factor rate is a flat multiplier applied to the amount you receive. It is not an annual rate. It does not compound. It does not go down if you pay early.
Borrow $50,000 at a 1.35 factor rate and you owe:
$50,000 × 1.35 = $67,500
That $17,500 is the total cost of the money, fixed on day one.
Factor Rate vs. APR: Why 1.35 Is Not 35%
An interest rate has time baked into it. A factor rate does not. The same 1.35 costs you dramatically different amounts depending on how fast you pay it back.
| Term | Total repaid | Cost | What it works out to annually |
|---|---|---|---|
| 18 months | $67,500 | $17,500 | Roughly 23% simple |
| 12 months | $67,500 | $17,500 | Roughly 35% simple |
| 6 months | $67,500 | $17,500 | Roughly 70% simple |
Same quote. Same $17,500. Three completely different costs of capital, because you had the money for three different lengths of time.
The declining balance problem
There is a second layer most quotes leave out.
Advances and short-term loans are usually repaid daily or weekly. That means you start paying the money back almost immediately — you never have the full $50,000 for the full term. By month four you might be carrying $20,000 while still paying against a cost calculated on $50,000.
Because your average outstanding balance over the term is roughly half the original amount, the effective APR runs close to double the simple annualized figure. On that 6-month example, a 70% simple rate lands somewhere north of 120% APR.
This is not a gotcha. It is just math, and it is why comparing a factor rate directly against a bank’s APR without doing the conversion will mislead you every time.
The conversion you should run before signing
Three inputs, and every funder can give you all three:
- Amount funded — what actually hits your account, after any origination or underwriting fee
- Total repayment — the amount funded times the factor rate
- Term in days — how long until it is paid off at the scheduled payment
Then:
Simple annualized rate = (Total repayment − Amount funded) ÷ Amount funded × (365 ÷ term in days)
Roughly double that figure to approximate the true APR on a daily- or weekly-pay product.
Run this on every offer in front of you. It is the only way to put a bank term loan, a line of credit, and an advance on the same scale.
What New York now requires
If you are a New York business borrowing under $500,000, this is no longer something you have to calculate yourself. Under New York’s Commercial Finance Disclosure Law, which took effect in August 2023, funders must give you a standardized disclosure before you sign — including the total repayment amount, the finance charge, and an estimated APR.
Other states have adopted similar rules. If a funder cannot or will not hand you an APR figure, that tells you something.
When a higher cost of capital is still the right call
None of this means a factor-rate product is a bad product. It means it is an expensive one, and expensive money is sometimes the correct decision.
It is worth it when the capital produces more than it costs. A $50,000 advance costing $17,500 that lets you take a $200,000 contract you would otherwise turn down is a good trade. Financing a $30,000 piece of equipment that generates revenue for eight years on a 6-month advance is usually not — that is a term loan or an equipment lease, matched to the life of the asset.
The rule of thumb: match the term of the money to the life of what it is buying. Short-term capital solves short-term gaps. It is a poor way to buy long-term assets.
The four questions to ask on any offer
- What is the total repayment amount, in dollars?
- What is the payment, and how often is it taken?
- What is the term in days?
- Is there a discount for early repayment — and if so, exactly how much?
That last one matters more than people expect. On a true factor-rate product, paying early often saves you nothing, because the cost was fixed at signing. Some funders offer a prepayment discount. Many do not. Ask before you sign, not after.
Questions about a specific offer on your desk? Our team will walk through the numbers with you, including offers from other funders.
