Guide
What is a factor rate, and how is it different from APR?
A factor rate is a fixed multiplier, such as 1.2 or 1.35, applied to the amount funded to calculate the total you repay. A $50,000 advance at a 1.25 factor rate means a $62,500 payback. Unlike APR, it does not account for how long you take to repay, so a factor rate and an APR cannot be compared directly without converting one to the other.
By Truidian · Updated
How a factor rate works
Multiply the amount funded by the factor rate to get the total repayment. The difference between the two is the financing cost. The cost is fixed at the start, so paying early typically does not reduce it unless the agreement says so.
Factor rates are most often seen with merchant cash advances and some short-term working capital products. They are different from the discount fees used in invoice factoring, which are normally a percentage of an invoice that can change with how long it takes to be paid.
Why a factor rate is not an APR
APR expresses the yearly cost of borrowing and takes the repayment period into account. A factor rate is a flat cost regardless of term. Repaying a 1.25 factor rate advance in four months is far more expensive on an annualized basis than repaying it in twelve, even though the dollars owed are identical.
To compare products on equal terms, ask each provider for the total payback, the expected repayment period, and the equivalent annualized cost, or calculate it yourself from those three numbers.
What to ask before accepting an offer
A short checklist keeps offers comparable.
- What is the total payback amount in dollars?
- How is repayment collected: daily, weekly or as a share of sales?
- Is there any benefit to repaying early?
- What fees are deducted from the amount funded before it reaches you?
- Is the estimated cost shown as an annualized rate anywhere in the paperwork?
FAQ
Common questions.
What is a good factor rate?
There is no single answer because the right comparison depends on the repayment period. Factor rates commonly fall between about 1.1 and 1.5, but a lower multiplier repaid over a longer term can still cost less than a higher one repaid quickly. Always convert to total dollars and timing.
Do factor rates apply to invoice factoring?
Not usually. Invoice factoring is typically priced as a percentage of each invoice, often increasing with the number of days it takes your customer to pay, rather than as a fixed multiplier on funds received.
Does paying back early lower the cost with a factor rate?
Often not. Many agreements fix the total payback up front. Some offer early-payoff discounts, so check the contract rather than assuming.
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Truidian is a business solutions company, not a lender, factoring company or payment processor. Services are offered by participating third-party providers and are subject to their approval and terms. Figures shown are general ranges, not offers or quotes. This content is general information, not legal, tax, accounting or financial advice.