Strategy
Factor Rate vs APR: Understanding the Real Cost of Capital
Cost of capital is the single most important number in any funding decision, and it is also the number most often obscured. Learning to normalize offers takes about ten minutes and can save you a great deal.
The three numbers that matter
- Total payback in dollars — advance amount multiplied by the factor rate
- Net funded amount — the payback minus every fee actually deducted at funding
- Term in months — how long you are making payments
Converting factor rate to annualized cost
Take the total cost, divide by the amount you actually received, then annualize it over the term. A $100,000 advance at a 1.30 factor over 12 months costs $30,000 on $100,000 received over one year — roughly a 30 percent simple annual cost.
Shorten that same deal to six months and the annualized cost roughly doubles, even though the factor rate on the paper never changed. Term length is the hidden variable in every comparison.
Fees that change the answer
- Origination or underwriting fee, often 2 to 5 percent deducted at funding
- ACH or processing fees charged per payment
- Wire fees at funding
- Default and late fees
- Renewal fees when refinancing an existing position
Comparing offers correctly
Build a simple table with net funded amount, total payback, payment, frequency, term and annualized cost. The cheapest headline factor rate frequently loses once fees and term are normalized.
This is exactly the exercise we run with clients. Our partners compete for the file, and we lay the offers out side by side in plain English so the decision is made on the real number.
Frequently asked questions
- Is a lower factor rate always better?
- No. A lower factor over a much shorter term can cost more per year than a higher factor over a longer one.
- Do advances have an APR?
- Advances are not loans and do not carry a stated APR, but you can and should calculate an equivalent annualized cost for comparison.
- Should I always take the cheapest offer?
- Cheapest is usually right, but payment size and term flexibility matter too. An affordable payment beats a marginally cheaper one that strains cash flow.