Costs · 5 min read

Factor rate vs APR, and how to read the real cost

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A factor rate and an interest rate look similar and behave completely differently. Reading one as the other is the most common costly mistake in this market.

01How a factor rate works

A factor rate is a multiplier on the amount advanced. At a 1.30 factor on $100,000, you repay $130,000 — the cost of the money is $30,000. That is it. The multiplier is fixed at signing, and it does not change as you pay down the balance.

02Why it is not an interest rate

Interest accrues on a balance that shrinks as you repay. A factor does not. The full $130,000 is owed whether the payments run for six months or eighteen, unless your agreement specifically offers a discount for early payoff. That single difference is why a factor rate that reads like a modest percentage can be expensive in annualized terms.

03Getting to a comparable number

To compare an advance against a loan, convert to dollars first and time second. Take the cost of the money, divide by the amount advanced, then annualize it by the actual repayment period. A $30,000 cost on $100,000 repaid over six months is a very different annualized figure from the same cost spread over eighteen months, even though both are "1.30."

04Fees the factor does not include

Origination or underwriting fees usually come out of the funded amount, which means you receive less than the stated advance while still repaying the full multiplied total. Ask what hits your account, not just what is approved.

05Run your own numbers

The true-cost calculator on our homepage does the first part of this instantly: enter the advance amount and the factor rate, and it shows the total repaid and the cost of the money. Bring the payment amount and frequency to the conversation and we will work out the annualized picture with you.