Is a 1.4 factor rate high?

Why there is no yes or no

A factor rate is a multiplier with no time in it. Asking whether 1.4 is high is like asking whether $10,000 is expensive — expensive for what, over how long, instead of what?

Illustrative only — $25,000 advanced at 1.40 repays $35,000. The cost is $10,000. That is true regardless of the term.

The same factor, two very different deals

Repaid in four monthly instalments of $8,750, the periodic rate that makes those payments worth $25,000 today is 14.9625% a month. Annualised by twelve, that is 179.6%.

Repaid in eighteen instalments of $1,944.44, the monthly rate is 3.8099% and the annualised cost is 45.7%.

Both cost $10,000. One is charging roughly four times as much for the use of the money as the other. If somebody tells you 1.4 is high or low without asking how long, they are guessing.

The quick method — cost over advance, scaled to a year — gives 120% and 26.7% for the same two cases. It understates both, because you do not hold the full $25,000 for the full term. Use it as a sanity check, not as an answer, and say which method you used.

The daily-debit version of the same deal

Most advances at this factor are not repaid monthly. They are debited every banking day, which changes the arithmetic in your favour on the schedule and against you on the timing.

Now apply the fees. With 5% taken at funding, $23,750 reaches the account while the repayment obligation stays at $35,000. The effective factor on the money you actually received is 1.4737, and the same calculation on $23,750 annualises to 173.9%.

The deal was described as 1.40. The number that governs your bank account is 1.47, and the difference is entirely fees you were told about and did not add in.

The renewal, which is where the real cost lives

Total repayment on the new deal is $56,000. Of the $40,000 gross, $17,500 clears the old balance, so $22,500 of new cash reaches you.

Price the new money properly. Before the renewal you owed $17,500. After it you owe $56,000. The obligation went up by $38,500 and you received $22,500. That is a factor of 1.71 on the marginal money, not 1.40.

This is the single most expensive thing that happens in this product, and it happens quietly, because the renewal is presented as the same rate you already accepted. Ask one question before renewing: how much new cash reaches my account, and by how much does my total obligation increase? Divide the second by the first.

What actually decides whether the deal is bad

1. Can you make the payment? $8,750 a month against your free cash flow, in your worst month, not your average one.
2. What is the money for? $10,000 of cost against a job with a known margin is a different question from $10,000 of cost against a shortfall.
3. What else was available? A deal is expensive relative to the alternatives you could actually get, not relative to a rate you read about.
4. What is the total, after fees? If points come out of the wire, you are paying $10,000 for less than $25,000.

The questions to ask instead

• What is the total repayment in dollars?
• What is the payment, how often, and for how many payments?
• What comes out at funding?
• Is the term fixed, or does it move with deposits?
• Is there an early payoff discount, in writing?

Once you have those five, you can compute the annualised cost yourself with the calculators and compare it to anything else on the table. Until you have them, 1.4 is a number without a meaning — see how to annualise a factor rate.

How to tell you are being quoted a factor at all

Some offers never say the word. Signals that the number in front of you has no time dimension in it:

• A "rate" quoted with two decimal places and no percent sign — 1.32, 1.45.
• A total repayment that is a clean multiple of the funded amount.
• A "cost of capital" or "buy rate" expressed as a percentage, where the percentage is the factor minus one rather than an annual rate. Thirty-two percent on a four-month deal is not thirty-two percent a year.
• An estimated term rather than a fixed one, because the payment is a share of receipts.
• A quoted payment and a quoted term with no stated rate at all. That is a factor deal where nobody wrote the factor down.

Where the percentage is the factor minus one and the term is short, the annualised cost is a large multiple of the number you were shown, and the conversion needs the term. See factor rate vs APR for the mechanics.

Paying it off early makes it worse, not better

This is the part of the product that surprises people most, and it follows directly from there being no time in the number.

With a written early-payoff discount of 10% on the remaining balance you would deliver $33,250 instead, and the annualised figure lands at 248.8% — better, and still far above where you started.

Two things follow. Never treat early repayment on a factor-priced advance as a saving unless there is a discount in the contract, in writing, with the calculation stated. And when you are comparing a factor deal against an amortising loan, remember that the loan gets cheaper if you clear it early and the advance does not. That asymmetry is worth as much as a point or two of headline pricing.