APR vs Factor Rate: Which Number Tells the Truth?

How a factor rate works

A factor rate multiplies the amount funded to get the total payback. A $50,000 advance at 1.25 means you repay $62,500, no matter how fast you pay it back.

Factor rates are quoted as decimals, usually between 1.1 and 1.5 in the market. Multiply the funded amount by the factor and you have the full repayment. The cost is the difference.

Example (illustrative): $50,000 at 1.25 equals $62,500 repaid, so the cost is $12,500. It stays $12,500 whether you finish in four months or eight, unless the agreement gives a payoff discount. That fixed-cost feature is why factor pricing is common on working capital and revenue-based financing.

How APR works

APR expresses the cost as a yearly percentage of the balance you carry, including certain fees. Interest accrues on what is still owed, so paying down sooner lowers total cost.

APR stands for annual percentage rate. It spreads cost across a year and accounts for the fact that your balance falls as you repay. On an amortizing term loan, you pay interest only on the remaining principal, so early payments carry more interest and later payments carry less.

That makes APR a good way to compare loans of different lengths, because it puts them on a yearly scale. It is also why APR is the headline number on bank loans and SBA products.

Why the same price can look wildly different

A fixed factor cost paid over a short time converts to a high APR, because the money was outstanding for only part of a year and was repaid in pieces.

Here is an illustrative case. You receive $50,000 and repay $62,500 in equal daily or weekly pieces over six months. The cost is $12,500, or 25 percent of the amount funded. But because you were paying it back as you went, your average balance was roughly half of $50,000. The cost relative to the average balance, stretched to a full year, produces an APR well above 25 percent.

That does not mean the factor deal is a trick. It means 25 percent of the amount funded over six months is a different measurement than a yearly rate. Both are true. They simply measure different things.

Side-by-side comparison

Compare total dollars repaid, cash received and months outstanding. Convert to a common measure only after you have those three.

Offer B costs less in dollars but takes twice as long to repay and has a lower payment burden per month. Offer A is faster money out the door and done sooner. The right pick depends on how quickly your project pays back. The numbers above are examples, not quotes.

Converting a factor rate to an approximate APR

Subtract 1 from the factor to get the cost percentage, then scale for the repayment period and the shrinking balance. Our calculator does the arithmetic for you.

A rough method for equal payments over the term: take the cost (factor minus 1), divide by the term in years, then roughly double it because the average balance is about half the original. For 1.25 over six months, 0.25 divided by 0.5 years is 50 percent, doubled is about 100 percent. This is an estimate only. Precise APR requires the actual payment schedule.

Skip the algebra and use the factor rate calculator, or check payment size with the daily payment calculator. Our guide on business loan rates gives context for typical ranges by product.

Common mistakes when comparing the two

Most errors come from comparing different periods, ignoring fees, or reading a factor as an annual percentage.

Three mistakes show up again and again. First, reading 1.25 as 25 percent a year. It is 25 percent of the funded amount over whatever term the deal runs, which may be only a few months. Second, comparing a rate on the full balance with a rate on the declining balance. They are different measures even when the numbers look alike. Third, forgetting fees that reduce the cash you receive.

A clean habit is to ask every funder the same four questions in the same order: how much cash will I receive, how much will I repay in total, how long will I take to repay, and what is the payment each period. With those answers you can rank offers in minutes, even if one is quoted as APR and another as a factor.

Also ask whether early payoff earns any discount. On fixed-payback deals it often does not, which makes the term you actually need the most important input of all.

Which one should you ask for

Ask for both, plus the payment schedule. Then judge the deal by payback against what the money earns you.

A fair offer can be explained in either language. If a funder will only quote one and cannot give you total repayment and term, be careful. The question that matters is whether the project funded by the money returns more than the cost, and whether you can carry the payment while it does.

If a new truck or a stocking order will earn back $20,000 in profit over the term and the financing costs $8,000, the deal works even at a high APR. If the money covers a gap with no return, even a modest rate hurts. ROI Funder starts from that payback math. You can see offers after a short application with a soft pull.