What is a factor rate, and what does one actually cost?

The calculation

Multiply the amount advanced by the factor. That is the total you repay. Subtract the advance and you have the cost.

Illustrative only — $40,000 at a factor of 1.30 repays $52,000. The cost is $12,000. The same figure comes from 0.30 x $40,000, and both routes must agree.

Why it is quoted this way

A factor rate belongs to a purchase of future receivables rather than a loan. The funder is not lending at a rate over time; it is buying a fixed dollar amount of your future revenue for a smaller amount today. There is no balance accruing interest, so there is nothing for an interest rate to describe.

That is also why the total does not fall when you repay faster. See is a merchant cash advance a loan for what the structure changes.

The part the number hides

The multiplier says nothing about how long the money is out, and that is where the entire cost of the money lives.

Take the same $52,000 total. Repaid in five monthly instalments of $10,400, the rate that discounts those payments back to $40,000 is 9.4349% a month, an annualised 113.2%. Repaid in twelve instalments of $4,333.33, it is 4.2869% a month, an annualised 51.4%.

The funder receives $52,000 in both cases. The price of the money differs by more than sixty percentage points, and nothing in the quoted 1.30 tells you which one you are getting.

What to ask alongside the factor

• The total repayment in dollars.
• Every fee deducted at funding, so you know what actually arrives.
• The remittance amount and how often it is taken.
• Whether the term is fixed or moves with your deposits.
• Whether early payoff is discounted, and by how much in writing.

Fees change the factor you are actually paying

The multiplier is applied to the advance. The fees come off the wire. Those are not the same denominator.

Your cost is $13,245 on $38,755 of cash — 34.2%, not the 30% the factor implies. The effective factor on the money that actually arrived is 1.3418.

Which is why the first question is never what the factor is. It is what reaches your account, and what you deliver in total. Those two numbers survive every pricing convention.

Remittance frequency moves the price too

Take the same $52,000 total against the same $38,755 received.

Repaid as five monthly instalments of $10,400, the implied rate is 10.67% a month, roughly 128% annualised.

Repaid as 110 daily debits of $472.73, it is 0.559% a day, roughly 146% annualised across 260 business days.

Same total, same cash, different price — because money taken earlier is money you did not have. A daily product is always more expensive than a monthly one at the same total and the same finish date, and none of that difference appears in the quoted factor.

Two quotes, and why the bigger factor can be the cheaper money

The lower factor costs $6,500 less in dollars and about 21 percentage points more per year. Neither is wrong and neither is the answer on its own. What decides it is whether the business can carry $10,167 a month for six months. If it can, quote one is cheaper money. If it cannot, quote one is not a cheaper deal — it is a deal that fails.

Early payoff does not work the way you expect

On an interest-bearing loan, paying early stops the interest. On a fixed-cost purchase there is nothing accruing to stop, so the total normally does not move.

So the decision at month six is not whether to save interest — there is none to save. It is whether the cash is worth more elsewhere, and whether clearing the position opens a cheaper facility that is currently unavailable because the debit is visible in your statements. Frequently that second reason is the real one, and it is a good reason.

If an early-payoff discount was mentioned, find it in the document. A reduced total, with the window and the figure written down, is a term. A remark on a call is not.

The comparison to avoid

Do not put a factor rate next to an interest rate and treat the smaller number as the cheaper deal. A 1.30 factor is not "30%" in any sense an interest rate would recognise. It becomes a rate only once you supply the term and run the conversion, and you should run it yourself — see how to annualise a factor rate or use the calculators.

The one figure that never needs converting is the total. $52,000 is $52,000 whatever the pricing convention, and it is the number to write at the top of every offer you are comparing.

What to write on the comparison sheet

Whatever the pricing convention, two figures are immune to it: the cash that reaches your account after every deduction, and the total you deliver. Write those two at the top of every offer, in dollars, before anything else goes on the page.

Then add the term, taken from your own deposits rather than the funder's projection. Those three numbers turn every quote you are holding into the same kind of object, which is the only condition under which comparing them means anything.