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Effective APR APR
Also called effective annual rate, true APR, annualized cost of capital.
The annualized cost of financing including fees and reflecting when the money is actually repaid, which is the only basis on which two differently structured offers can be compared.
Drafted with AI assistance and checked by a person. Its factual claims were verified against the sources listed at the end, by Find Me Funders research desk.
What it means
An APR expresses cost as a rate per year on the money you actually have use of. Two things make it different from a headline cost figure. It includes fees, including those netted out of proceeds so you never received them. And it accounts for amortization: on any product repaid in installments, the balance is shrinking throughout, so the average amount you have use of is well below the amount funded.
That second point is what surprises people. On a daily or weekly remittance, the average outstanding is roughly half the funded amount over the life of the deal. The annualized rate therefore lands near double the naive calculation of cost divided by funded amount divided by years.
Why an advance needs an assumption
A loan has a contractual schedule, so its APR is determinate. An advance ends when the purchased total has been delivered, and that date moves with sales, reconciliations and returned debits. Any APR quoted on an advance rests on an assumed repayment period, which is why the state disclosure statutes that require one call it an estimated APR.
Where this one catches people
A factor rate and an APR are not the same kind of number and cannot be compared by eye. 1.40 is not "40%". The second half of the trap is directional: at a given factor rate, a shorter collection period means a higher APR, not a lower one. Faster repayment of an advance makes it more expensive in annualized terms, which is the reverse of every intuition built on loans.
Worked through
$50,000 funded, $70,000 to remit, collected at $583.33 per banking day over 120 payments. Cost is 40% of the funded amount. The cash flows imply an annualized rate near 149%.
The same $50,000 and the same $70,000 collected at $291.67 per banking day over 240 payments still costs exactly $20,000 and annualizes near 75%. Identical price tag, half the annualized rate, because the business had the money twice as long.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Sources and checks
Every figure on this page traces to a document someone read, on a date. Where a check is past its review date it says so rather than passing as current.
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$50,000 funded / $70,000 remitted at $583.33 over 120 banking days annualizes near 149%, and the same total at $291.67 over 240 banking days annualizes near 75%
example583.33 x 120 = 69,999.60; solving 50,000 = 583.33 x (1-(1+i)^-120)/i gives i = 0.5923% per banking day, x 252 = 149.27% nominal annual. 291.67 x 240 = 70,000.80; i = 0.2971%, x 252 = 74.88%. Cost is 20,000 (40% of funded) in both cases, confirming the entry's point that halving the collection speed halves the annualized rate at an unchanged price.
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the definition's rule of thumb that the annualized rate lands 'near double the naive calculation' holds on these cash flows
definitionNaive figure for the 120-day case = 0.40 / (120/252 years) = 84.0%; actual 149.27%, a ratio of 1.78. For the 240-day case = 0.40 / (240/252) = 42.0%; actual 74.88%, ratio 1.78. 'Near double' is a fair statement of both.
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state disclosure statutes that require an APR on sales-based financing do call it an estimated APR, as the definition states
definition23 NYCRR 600.6(c) requires sales-based financing to disclose an 'Estimated Annual Percentage Rate (APR)'; the California regulations use the same 'Estimated Annual Percentage Rate (APR)' label at s 2065.
Effective APR — common questions
What does effective apr mean?
The annualized cost of financing including fees and reflecting when the money is actually repaid, which is the only basis on which two differently structured offers can be compared.
Where does effective apr catch people out?
A factor rate and an APR are not the same kind of number and cannot be compared by eye. 1.40 is not "40%". The second half of the trap is directional: at a given factor rate, a shorter collection period means a higher APR, not a lower one. Faster repayment of an advance makes it more expensive in annualized terms, which is the reverse of every intuition built on loans.
Is effective apr the same as an interest rate?
Effective APR is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does effective apr apply to?
Merchant Cash Advance, Working Capital, Term Loan, Business Line of Credit, Revenue-Based Financing.
Is there a worked example of effective apr?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside effective apr?
Disclosure law, Factor rate, Fully amortizing, Net funding, Origination fee.
Has this definition been checked?
Yes. Its claims were verified against the sources listed at the end of this page, and the reviewer is named.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.