How to turn a factor rate into a dollar cost

The multiplication

Advance times factor equals the total you repay. Total minus advance equals the cost. There is no third step.

Illustrative only — an advance of $50,000 at a factor rate of 1.35 repays $67,500. The cost is $17,500. You get the same figure by multiplying the advance by the factor minus one: 0.35 x $50,000 = $17,500. Both routes have to agree, and if yours do not, one of the two numbers you were given is not the one you think it is.

Nothing in that calculation refers to time, which is why a factor rate is easy to quote and hard to compare. Repay the $67,500 over four months or over eighteen and the funder receives $67,500 either way.

The number you repay against is not the number you receive

The factor is applied to the amount funded. Fees are usually taken out of the wire. So the multiplication starts from a bigger number than the one that lands in your account.

Suppose the same $50,000 advance carries a 2% origination fee deducted at funding. You receive $49,000. You still repay $67,500. Measured against the cash you actually got, the cost is $18,500, not $17,500, and the effective factor is 67,500 / 49,000 = 1.3776.

That gap is small in this example and large in others, and it is entirely under the funder's control. A quote of 1.25 with five points deducted and a quote of 1.30 with nothing deducted produce the same total dollars on the same advance. The headline number moved. The money did not.

Working backwards from a quote

If you are given a total instead of a factor, divide: $67,500 / $50,000 = 1.35. If you are given a factor and a term but no total, multiply first and then divide by the number of payments — never the other way round.

Grossing up is where people slip. To have $40,000 in hand after a 3% deduction you do not borrow $41,200. You borrow $40,000 / 0.97 = $41,237.11, and the fee is $1,237.11. At 1.35 that advance repays $55,670.10, so the cost is 39.18 cents for every dollar that reached your account, against a headline of 35 cents. A 3% deduction is never a 3% cost, because the 3% is charged on a number larger than the one you keep.

The payment is the figure you actually live with

The total tells you what the money costs. The payment tells you whether you can survive it.

Take the $67,500 total. Over six months of daily debits — call it 126 banking days, at 21 a month — that is $535.71 a day. Billed weekly across the same six months it is 26 payments of $2,596.15. Billed monthly it is six payments of $11,250. In each case the final payment absorbs the rounding. Same cost, three very different demands on a Tuesday morning.

Work out the payment before you work out the rate. A business that cannot clear $2,596.15 a week does not need to know the annualised cost to know the answer.

What the conversion does not tell you

Turning the factor into dollars settles the price. It settles nothing else.

Comparing two offers that look identical

Offer A: factor 1.28, no fees deducted, 9 months of daily debits. Total repayment $76,800, cost $16,800, cash received $60,000, 28 cents per dollar received. At 189 banking days, $406.35 a day.

Offer B: factor 1.22, a 5% origination fee deducted at funding, 7 months of daily debits. Total repayment $73,200, cost $13,200 against the funded amount — but the fee is $3,000, so you receive $57,000, and the cost against cash received is $16,200, or 28.4 cents per dollar. At 147 banking days, $497.96 a day.

The headline factors differ by six points. The cost per dollar received differs by four tenths of one cent. What actually differs is the payment: Offer B takes $91.61 more every banking day, about $1,924 a month, and finishes two months sooner.

So the comparison is not a price comparison at all. It is a cash-flow comparison, and the right question is whether the business clears $497.96 on an ordinary Tuesday. Two offers that look six points apart are the same price wearing different schedules, and the schedule is the part that decides whether you survive the deal.

A short worksheet

1. Write down the amount funded.
2. Multiply by the factor. That is the total repayment.
3. Subtract the amount funded. That is the cost before fees.
4. List every fee deducted at funding and subtract them from the amount funded. That is your cash.
5. Subtract your cash from the total repayment. That is the real cost.
6. Divide the total repayment by the number of scheduled payments. That is what leaves your account, and how often.

Six lines, no percentages, nothing that can be argued with. Do this for every offer on the table before anyone converts anything into a rate, and do the rate conversion afterwards with the calculators once the term is fixed. Two offers that are indistinguishable at step two are frequently very different by step five.

Where the arithmetic quietly changes after signing

Three things move the numbers after the worksheet is done, and none of them is visible in the multiplication.