Factor rate vs APR: why the same deal looks different

A factor rate is a multiple

If you are advanced $50,000 at a factor rate of 1.35, you repay $67,500. That is the whole calculation. The rate is not annual, not monthly, and not affected by how long you take.

An APR is a rate over time

An APR expresses cost as an annualised percentage of the balance you actually owe as it falls. Scale the same $17,500 of cost on $50,000 across different terms and it reads roughly 47% over nine months, roughly 35% over twelve, and roughly 140% over three. The dollar cost never moved. Only the annualisation did.

Those three figures use the flat method: cost divided by the advance, scaled to a year. It is the arithmetic most people do in their head, and it understates the answer. You do not hold $50,000 for the whole term. You hold $50,000 on day one and almost none of it by the last payment, because you have been handing it back throughout, so the rate you are paying on the balance you actually have is higher.

Solve it properly on the same illustrative numbers — the periodic rate that makes level payments equal the cash you received — and the deal reads 199.8% over three months, 77.6% over nine and 59.4% over twelve. Both methods are defensible. Quoting one and comparing it against the other is not, and it happens constantly.

Which is why early repayment usually does not help

On a term loan, paying early saves interest. On a factored advance, the amount owed is fixed at signing, so paying early saves you nothing unless the contract contains an explicit early-payoff discount. Some agreements carry one, written as a reduced factor if the balance is cleared inside a stated window. Most do not, and the absence is rarely mentioned on a marketing page — it is a clause you have to go and find.

Illustrative only — $50,000 at 1.35 is $67,500. Suppose a clause cuts the factor to 1.22 if the balance clears within 90 days. That is $61,000, a saving of $6,500, which is real money.

It is also $11,000 of cost for three months of the money, and on a per-month basis that is a great deal more expensive than carrying the same deal to term. A discount for speed is a discount. It is not the same thing as a cheap deal, and the two get confused most often at the moment someone is offering you a renewal.

Fees are not in the factor

The factor applies to the advance. The fees come out of the wire, and the multiple never sees them.

Illustrative only — the same $50,000 at 1.35 with $2,500 deducted at funding. You repay $67,500 and you received $47,500. Cost per dollar received is 42.1%, not 35%. Repaid in twelve monthly instalments that is a nominal annualised 70.4% rather than 59.4%, and over six instalments 132.8%.

The consequence is worth stating plainly: a quote of 1.32 with four points deducted costs more than a quote of 1.35 with none. Check it — $66,000 repaid against $48,000 received is 37.5% per dollar, against 35% on the higher factor. Nothing on either quote tells you that, because the fee and the factor are printed in different places.

How to compare two offers that quote differently

Convert both to total dollars, not to a rate. Take the amount you receive, subtract every fee taken at funding, and compare that net figure against the total you will repay. That single number is comparable across any pricing basis. The calculators do this arithmetic.

A lower factor is not a cheaper deal

Illustrative only — two offers on the same $50,000.

One at 1.30, delivering $65,000 in 120 business days at $541.67 a day. One at 1.38, delivering $69,000 in 220 business days at $313.64 a day.

The first costs $15,000 and the second costs $19,000, so the first is cheaper by $4,000. Annualised on those assumed terms, the first is about 115% and the second about 78%, so the second is cheaper by that measure. And the first takes $228 more out of every business day.

Three measures, three different winners, one pair of offers. Which measure governs depends on what is scarce in your business. If total dollars are scarce, the shorter deal. If weekly cash is scarce, the longer one, and it is not close. Work out which constraint you are under before you read the quotes, because the first number you look at tends to become the one you optimise.

What to ask for in writing

The amount funded, the amount repaid, every fee and when it is deducted, the remittance amount and frequency, and whether there is an early payoff discount. If a funder will not put those five things in writing before you sign, that is information too.

Pinning down the term, since everything above depends on it

An advance has no maturity date, so the term inside any annualised figure is an assumption somebody made. Two ways to make it yours instead of theirs.

Then run both — the optimistic term and the flat one — and quote the pair rather than a single figure. Note what happens in the slow case: the term stretches, the annualised cost falls, and the dollar cost does not move by a cent. A bad year makes this product look cheaper by the measure everyone quotes, which is a good reason to keep the dollar total in front of you at all times. See how to annualise a factor rate for the full method.

Why this site never puts them in one column

On our comparison tables, pricing basis is its own row above the rate row. Two lenders quoting 1.13 and 9.99% are not one better than the other; they are measuring different things. A table that stacks them in the same column is not comparing, it is misleading.