Factor Rates vs. APR: What Business Funding Really Costs

Two different rulers for the same thing

Business funding products price themselves with two different rulers. Loans, lines of credit, and credit cards quote an interest rate or APR — an annualized percentage charged on your outstanding balance. Merchant cash advances and some short-term products quote a factor rate — a flat multiplier on the amount funded.

Neither ruler is dishonest, but they measure differently, and confusing them costs real money. An owner who sees 'factor rate 1.20' and thinks '20 percent interest — about the same as my credit card' is making an error that can run into thousands of dollars, because those two numbers describe completely different cost structures.

This guide gives you the math to translate between the two, shows how term length quietly changes everything, and ends with a checklist for comparing any two offers on equal footing.

Factor rate math in 60 seconds

A factor rate is a multiplier, almost always between 1.10 and 1.50. Multiply the funded amount by the factor and you have the total payback. $50,000 at 1.20 is $60,000 repaid: $50,000 of principal and $10,000 of cost. $100,000 at 1.15 is $115,000 repaid. That is the entire formula.

The defining trait is that the cost is fixed at signing. With a loan, interest accrues over time, so paying early saves money. With a factor-rate product, the $10,000 is owed whether repayment takes four months or ten — unless the contract includes an early-payoff discount, which some do and which you should always ask about.

Fixed cost is genuinely simpler: you know the exact dollar figure on day one, and a slow month never inflates what you owe. The trade-off is that the clock works against you in the other direction — and that is where APR comes in.

Why a factor rate is not an interest rate

An interest rate is annualized and applies to a declining balance. A factor rate is neither. A 1.20 factor means a 20 percent total cost of funds — but if you repay over six months, you paid 20 percent for six months of money, not a year. Annualize that and the effective rate is far higher than 20 percent.

There is a second compounding effect: with a daily or weekly repayment schedule, you do not hold the full $50,000 for the whole term. You start paying it back almost immediately, so your average outstanding balance is roughly half the advance. Paying a fixed $10,000 fee on an average balance of about $25,000 over half a year is what drives effective APRs on short advances well into the high double digits or beyond.

None of this means an advance is a bad deal — it means an advance is a short-term tool priced in total dollars, and APR is a long-term ruler. Use APR to compare loan against loan. Use total cost, in dollars, over your actual expected term, to compare an advance against anything.

How term length changes effective cost

Here is the same factor rate at different speeds. Take $50,000 at 1.20 — $10,000 of cost — and look at what changes as the repayment term moves.

• Repaid over 12 months: $10,000 for a year of money on a declining balance — roughly comparable to a high-30s APR loan.
• Repaid over 6 months: the same $10,000 in half the time — effective annualized cost roughly doubles into the 70s.
• Repaid over 3 months: the same $10,000 in a quarter of the time — effective annualized cost climbs well into triple digits.
• The dollar cost never moved. Only the ruler did — which is exactly why funders with very short terms can advertise low-looking factor rates.

A worked comparison: advance vs. loan

Put two real offers side by side. Offer A: a $50,000 advance at a 1.18 factor, repaid over about six months — total payback $59,000, cost $9,000. Offer B: a $50,000 term loan at 12 percent APR over three years — monthly payment around $1,660, total repaid roughly $59,800, cost about $9,800.

Total dollar cost is nearly identical — but the products are nothing alike. The loan spreads payments thin over 36 months and is cheap per year of money. The advance compresses repayment into six months: heavier on weekly cash flow, far more expensive per year, but done quickly and likely funded in two days instead of several weeks.

Which is better depends entirely on the job. Bridging a 60-day receivables gap? The advance fits — you do not want a 3-year obligation for a 2-month problem. Financing a renovation that pays back over years? The loan fits, and if you can wait 30 to 90 days and qualify, an SBA loan beats both on price. Match the term of the money to the life of the need.

Fees that change the real price

The factor rate or APR is not the whole price. Fees shift the true cost, and they hide in different places depending on the product. Always ask for the complete list in writing before you sign — with any funder, including us.

• Origination fees — often deducted from the funded amount. A $50,000 advance with a $2,500 origination fee wires you $47,500 but you repay against the full $60,000, raising the effective factor.
• ACH, platform, or wire fees — small individually, meaningful when charged on every daily payment.
• Draw and maintenance fees on lines of credit — a low rate with a 2 percent draw fee on every pull is not a low rate.
• Prepayment penalties on loans — the inverse of an early-payoff discount; some bank products charge you for paying early.
• Late or default fees and the triggers for them — read the default section before the pricing section.
• Renewal pricing — some funders quote an attractive first deal and reprice steeply on renewal. Ask what deal number two looks like.

Questions to ask any funder

You can cut through any pricing structure with six questions. A transparent funder answers all of them immediately and in writing; hesitation on any of them is your answer.

• What is the total dollar amount I will repay, including every fee?
• What is the exact amount that will hit my bank account at funding, after any deductions?
• What is the payment amount and frequency, and what happens if my revenue drops — is there a reconciliation provision?
• Is there a discount for early payoff, and how is it calculated?
• Are there any fees not already included in the payback figure — origination, ACH, platform, renewal?
• Is there a confession of judgment or similar clause anywhere in the agreement?

Comparing offers apples-to-apples

The method that works for any mix of products: reduce every offer to three numbers. Cash in — exactly what reaches your account after deductions. Cash out — total of all payments including every fee. And the real term — how long the money is actually in your hands. From those, compute cost in dollars and cost per month of use. Now an advance, a loan, and a line can sit in one honest column.

Then weigh the two factors the numbers do not capture: speed and payment structure. Funding in 48 hours versus six weeks has real dollar value when an opportunity or emergency is on a clock — sometimes more value than the entire cost difference. And a payment schedule that flexes with revenue carries different risk than a fixed note in a seasonal business.

At Broadway Advance we will put our offers through exactly this exercise with you, including against options we do not sell. With over 25 partner funders and 50-plus programs, our interest is in the structure that fits — factor rates from 1.10 when an advance is the answer, and a straight referral toward cheaper money when it is not.

Frequently asked questions