Why an advance has no APR until you fix a term

Why the number is missing

An annual percentage rate expresses cost as a rate per unit of time. A factor rate expresses cost as a multiple with no time in it at all. Suppose a factor of 1.35 on $50,000: the answer is $67,500 whether the receipts take four months to arrive or fourteen.

The advance has no maturity date on purpose. The funder is buying receipts and takes the risk that they arrive slowly or not at all, so the document sets no deadline. No deadline, no term. No term, no APR on the page.

How to fix a term and compute one

1. Take the estimated remittance and its frequency from the offer.
2. Divide the purchased amount by the remittance to get the number of periods.
3. Convert to calendar time — for daily deals, count business days, roughly 21 or 22 per month.
4. Treat the cash you actually received as the amount advanced and the remittances as the payments, and solve for the periodic rate that makes them equate. Any spreadsheet's rate function will do it.
5. Multiply the periodic rate by the number of periods in a year.

Illustrative only — suppose $50,000 is advanced against a purchased amount of $67,500, delivered in equal daily amounts over exactly 105 business days. On that assumed 105-business-day term the annualised rate is roughly 157%. Assume instead that the same dollars are delivered over 378 business days, about eighteen months, and the annualised rate on that assumed term is roughly 44%.

A rough sanity check you can do without a spreadsheet: divide the dollar cost by the cash received, divide by the term in years, then roughly double it, because you are repaying continuously and your average outstanding balance is around half the original. In the five-month case that is 35% over five months, so 84% a year on the full amount, doubled to somewhere near 170% — close enough to know what kind of number you are dealing with.

Two offers where the cheaper factor is the more expensive deal

Illustrative only — $50,000 advanced, two offers.

Offer A is cheaper by $4,000 in dollars, more expensive by 37 percentage points annualised, and takes $228 more out of every business day.

All three of those are true simultaneously, and they rank the two offers differently. Which one governs depends on what is scarce. If you are short of total cost over the year, A. If you are short of daily cash, B, and it is not close. Decide which constraint you are actually operating under before you look at the quotes, because whichever number you look at first tends to become the one you optimise.

The rule that matters

Never state an annualised figure without stating the term it assumes, in the same sentence. And never carry a figure computed on one assumed term across to a deal with a different one. The most common way people mislead themselves here is to hear an annualised number once, attach it to the phrase "advances cost about that", and reason from it forever.

What the disclosure laws changed

Several states now require providers of commercial financing, including sales-based financing, to give standardised pre-contract disclosures that include an estimated APR calculated on an assumed term. New York's Commercial Finance Disclosure Law sits in NY Financial Services Law article 8, with rules issued by the Department of Financial Services. California's regime comes from SB 1235 and the Department of Financial Protection and Innovation's commercial financing disclosure regulations. Other states have added registration or disclosure requirements of their own, and the details differ.

Where those rules apply, you should receive an estimated APR before you sign. Two things to keep in mind about it. It is an estimate built on a projected term, so the realised cost moves if collection runs faster or slower. And coverage depends on the transaction, the amount and the state, so its absence does not always mean someone has done something wrong. Check the current text at the New York Department of Financial Services or the California DFPI rather than relying on a summary.

The practical answer

Ask for the number in dollars and days first, then annualise it yourself with the term written down beside it. That gives you something you can compare to a line of credit or a term loan on honest terms, which is the only reason to want an APR at all.

What to do with an estimated APR when a state gives you one

Where a disclosure regime applies, the estimated APR is useful and it is not a fact about your deal. Four checks before you rely on it.

The renewal case, where annualising misleads most

The figure is least reliable on a renewal. When a funder pays off your existing balance out of a new advance, the new advance is partly your own old debt, and the annualised rate quoted on the gross amount is computed on money you never received.

Work out the net new cash — new funded amount less the old balance being retired — and put the entire cost of the new deal against that figure. On most renewals the cost per dollar of genuinely new money is far higher than the headline suggests, and no disclosure sheet will present it that way, because the sheet describes the transaction rather than your position.