In short
- A factor rate tells you the total payback: $50,000 at 1.30 means repaying $65,000.
- An APR tells you the cost per year, so it depends heavily on how fast you repay.
- In our illustrative example, the same 1.30 works out to roughly 55% a year over 12 months and roughly 110% over 6 months.
- Compare offers on total dollars repaid, payment size and an estimated APR, not on the factor rate alone.
Two ways of stating a price
Business financing is priced in two very different ways, and mixing them up is one of the most common and costly mistakes owners make.
A factor rate is a multiplier. You take the amount funded and multiply it by the factor rate to get the total you repay. It is used mostly for merchant cash advances and some short-term working capital products. Illustrative factor rates run roughly 1.15 to 1.45.
An APR (annual percentage rate) expresses the cost of borrowing as a yearly rate, including interest and, depending on how it is calculated, certain fees. It is how term loans, lines of credit and equipment financing are usually quoted.
The trap is that a factor rate of 1.30 sounds like 30% interest. It is not. The 30% is the total cost over the whole term, however short that term is, and it is charged on the full original amount even as you pay it down.
The basic factor rate math
Take an illustrative advance of $50,000 at a factor rate of 1.30.
- Total payback: $50,000 x 1.30 = $65,000
- Cost of the money: $65,000 - $50,000 = $15,000
That $15,000 is fixed. It does not shrink if you pay faster, unless the agreement specifically offers an early payoff discount. What changes with the term is how quickly you pay it, and that is exactly what an APR captures.
Worked example: the same 1.30 over 6 months vs 12 months
Let's repay that same $65,000 on two different schedules. We assume equal payments, about 21 business days a month for daily payments, and no extra fees. All figures are illustrative.
| Schedule | Payment | Total repaid | Approximate APR |
|---|---|---|---|
| 6 months, 126 daily payments | About $515.87 a business day | $65,000 | Roughly 109% |
| 6 months, 26 weekly payments | $2,500 a week | $65,000 | Roughly 107% |
| 12 months, 252 daily payments | About $257.94 a business day | $65,000 | Roughly 55% |
| 12 months, 52 weekly payments | $1,250 a week | $65,000 | Roughly 54% |
Same factor rate, same $15,000 cost, but the six-month version costs about twice as much per year. You are paying the same fee for having the money for half as long, and because payments start right away, you only have the full $50,000 for a very short time.
How the APR estimate is worked out
The figures above are calculated as an internal rate of return (IRR). In plain terms, we look for the periodic interest rate at which the stream of payments, discounted back to today, adds up exactly to the $50,000 you received. Then we multiply that periodic rate by the number of periods in a year to get a simple annual rate.
For the 12-month weekly example:
- You receive $50,000 today.
- You pay $1,250 every week for 52 weeks.
- We solve for the weekly rate r where the present value of 52 payments of $1,250 equals $50,000. That rate comes out at a little over 1% a week.
- Multiply by 52 weeks, and the approximate APR is roughly 54%.
You can do the same thing in any spreadsheet. Put -50,000 in the first cell, then the payment amount in each of the following cells (one per payment), use the IRR function, and multiply the result by the number of payments per year (about 252 for business-day payments, 52 for weekly, 12 for monthly).
Why the result is only approximate
Treat any APR you calculate for a factor-rate product as an estimate, not an exact figure:
- Real payment calendars vary. Holidays, weekends and the date of the first debit all move the result.
- Percentage-of-sales payments change. If you repay a share of card sales instead of a fixed amount, the term depends on how busy you are. A slow season stretches the term and lowers the effective annual cost; a strong season shortens it and raises it.
- Fees change the math. If a $1,500 origination fee is taken out of the funding, you receive $48,500 but still repay $65,000, which raises the effective rate.
- Early payoff terms matter. If there is a discount for paying early, the effective cost can drop. If there is not, paying early raises the effective annual rate, because you pay the same dollars over a shorter time.
- Different APR conventions. A simple annual rate (periodic rate times periods) is used here. An effective annual rate that compounds would come out higher. Lenders and regulators may calculate APR in specific ways, and required disclosures can differ by jurisdiction.
Comparing a factor rate with a term loan
To see why this matters, compare the 12-month advance with an illustrative term loan.
| Advance, factor 1.30, 12 months weekly | Term loan, 20% APR, 12 months monthly | |
|---|---|---|
| Amount received | $50,000 | $50,000 |
| Payment | $1,250 a week | About $4,632 a month |
| Total repaid | $65,000 | About $55,580 |
| Cost of the money | $15,000 | About $5,580 |
On a term loan, interest is charged on the balance you still owe, so as you pay down the loan, you pay less interest. On a factor-rate product, the fee is fixed on the original amount from day one. That is the core reason a factor rate is more expensive than it looks.
A quick way to convert a factor rate in your head
There is no exact shortcut, but a rough rule of thumb helps you spot expensive offers:
- Take the cost as a percentage (factor rate minus 1). For 1.30, that is 30%.
- Because you are paying the balance down steadily, you only have about half the money, on average, over the term. So the cost on the money you actually have is roughly double: about 60%.
- Divide by the term in years. Over 1 year, that is roughly 60% a year. Over half a year, roughly 120% a year.
This shortcut slightly overstates the result compared with a proper IRR (roughly 55% and 109% in our table), but it gets you into the right range in seconds, which is usually enough to tell whether an offer deserves a closer look.
What to ask for on any offer
- The amount you will actually receive after any fees are deducted.
- The total you will repay in dollars.
- The payment amount and frequency: daily, weekly, bi-weekly or monthly.
- The expected term, and whether it is fixed or depends on your sales.
- An APR or estimated annual cost, if the provider will state one. Some jurisdictions now require certain commercial financing disclosures; check the offer against what the provider tells you.
- Early payoff terms: is any of the fee forgiven if you repay early?
Our guide on how to read a business loan offer covers the rest of the contract, from personal guarantees to default clauses. For a direct comparison of products, see our compare page.
When a higher cost can still make sense
A high APR is not automatically a bad deal. If a short-term advance lets you buy discounted stock that turns into much more profit within a few months, the cost can be worth paying. The problem is not the price itself; it is paying that price without knowing it, or using expensive money for something that will not earn it back. Our guide is a merchant cash advance worth it? walks through that decision.
How CELER Funding helps
CELER Funding is a free referral service, not a lender. Lenders may pay us a referral fee when a deal closes. We introduce you to independent lenders and funding companies across Canada and the US, and we want you to see the total payback in dollars before you sign. If a cheaper product is realistic for your business, such as a line of credit or a government-backed loan, we would rather point you there.
This guide is general information, not financial, legal or tax advice. All figures are illustrative. When you are ready, tell us what you need.