What a factor rate is
A factor rate is a decimal, usually between 1.1 and 1.5, that sets the total payback on a funding offer. Funding amount times factor rate equals total repayment.
Factor rates are common on working capital and revenue-based products. They are quoted as a decimal such as 1.25 or 1.35, not as a percentage. The fee is fixed on day one. It does not grow if you take longer to repay, and it does not shrink much if you repay early unless the contract says so.
That fixed fee is the point. You know the full dollar cost before you sign. What you do not know from the factor rate alone is how it compares with an annual rate, because the time you hold the money is missing from the number.
The math, step by step
Multiply the funded amount by the factor rate to get total payback, then subtract the amount received to get the cost in dollars.
Here is an illustrative example. You receive $50,000 at a factor rate of 1.30.
- Total payback: $50,000 x 1.30 = $65,000.
- Cost of funding: $65,000 - $50,000 = $15,000.
- Cost as a share of the amount received: $15,000 / $50,000 = 30 percent.
Always check whether any origination or other fees are deducted from the funded amount. If you ask for $50,000 and receive $48,000 after fees, your true cost is higher than the factor rate suggests. Our worksheet on the total cost of a funding offer walks through this check.
Why a factor rate is not an APR
APR spreads the cost over a full year. A factor rate ignores time, so the same factor rate can mean very different annual costs depending on the repayment term.
Take the same $15,000 cost on $50,000. If you repay over 12 months, the annualized cost is moderate. If the product repays in 6 months, you are paying the same dollars for half the time, so the annualized figure roughly doubles. Shorter terms make a given factor rate more expensive on an annual basis.
That does not make factor-rate products bad. A short, fast payback can be reasonable when the money produces a return quickly. It means you should compare offers on total dollars, term and the money the funding earns for you. Read what APR is and how it is calculated to see the annualized view.
Turn the factor rate into a payment you can plan around
Divide total payback by the number of payments, then convert to a monthly equivalent so you can compare offers with different schedules.
Say the $65,000 payback runs over about 10 months of repayment. That is roughly $6,500 a month. If payments are daily, divide by the number of business days instead. The weekly or daily amount will look small, but the monthly total is what hits your cash flow.
- Daily or weekly payments: multiply up to a monthly figure.
- Revenue-based repayment: estimate using your average monthly sales, remembering that payments rise and fall with sales.
- Check the total against your margin. If payments take a large share of monthly revenue, test a slow month first.
Use daily payment to monthly equivalent for the conversion and a stress test for slower months before you sign.
What a typical factor rate range implies
Higher factor rates usually reflect shorter terms, lower credit or higher perceived risk. A rate is only good or bad relative to what the money earns.
Offers vary with credit, revenue consistency, time in business and industry. Rather than chase a specific number, ask what the funding must produce for the cost to make sense.
| Factor rate | Total payback | Cost in dollars |
|---|---|---|
| 1.15 | $57,500 | $7,500 |
| 1.25 | $62,500 | $12,500 |
| 1.35 | $67,500 | $17,500 |
| 1.45 | $72,500 | $22,500 |
If a $50,000 purchase brings in $40,000 of added profit, a $12,500 cost is easy to justify. If it brings in $10,000, it is not. See what a 1.3 factor rate costs for a deeper example.
How ROI Funder approaches factor-rate offers
ROI Funder starts with what the money will produce, then shows true cost, payback period and monthly-equivalent payments before you decide.
Our funder network includes working capital and revenue-based options, plus term loans and lines of credit that use interest rates instead of factor rates. We match your file to the funders that fit, then lay the offers side by side in dollars so you can compare them fairly. ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ in monthly revenue, with funding from $5,000 to $5,000,000.
Applying takes a few minutes with a soft credit pull and no obligation to accept an offer. Look at working capital and revenue-based financing to see how each is structured.
Frequently asked questions
Is a factor rate the same as interest?
No. A factor rate is a fixed multiplier on the amount funded, so the cost is set up front. Interest accrues over time on a balance.
Can I save money by repaying a factor-rate product early?
Sometimes not, because the fee is fixed. Ask whether the contract gives any discount for early payoff before you sign.
How do I compare a factor rate with a loan APR?
Convert both to total dollars repaid over the same period, and check the monthly-equivalent payment. APR alone can mislead on short terms.
What is a good factor rate?
It depends on what the money earns. A cost is good when the added profit from the funding clearly exceeds it.