Glossary
Factor rate
A multiplier — typically 1.1 to 1.5 — applied to the amount advanced to give the total you must repay. It is not an interest rate, it is not an APR, and comparing it to one without converting will mislead you badly.
Factor rate: A multiplier — typically 1.1 to 1.5 — applied to the amount advanced to give the total you must repay. It is not an interest rate, it is not an APR, and comparing it to one without converting will mislead you badly.
Why it matters
A factor rate of 1.3 on $100,000 means repaying $130,000. That reads like “30%” and it is not 30% a year — because the repayment period is usually months, not a year, and because you repay continuously while the charge was fixed at the start.
Repay a factor-rate advance early and you generally owe the same total. There is no interest to save. The effective annualized cost of a 1.3 factor repaid over nine months is far above 30%, and over six months higher still.
Where you will meet it
Merchant cash advances almost universally, plus much revenue-based finance and some short-term online lending. If an offer quotes a “buy rate,” a “payback amount,” or a total rather than an APR, you are looking at factor pricing.
The three numbers that set the real cost
- The factor — how much you repay in total.
- The term — how fast. The same factor over six months costs roughly double the same factor over twelve.
- The payment frequency — daily debits repay faster than weekly, which raises the effective cost and hits your cash flow harder.
Fees come off the top as well. An advance quoted at $100,000 with a 3% origination fee puts $97,000 in your account while you repay against the full $100,000.
What to ask before you sign
- What is the total dollar amount I repay?
- What lands in my account after fees?
- What is the payment, how often, and over how many days?
- Is there any discount for early repayment, and is it in writing?
- Is the payment fixed, or does it reconcile with actual revenue?