Glossary · Business Finance

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Factor Rate Meaning

A factor rate is a multiplier applied to the amount advanced, giving the total a business repays over the life of the finance. It is quoted as a decimal rather than a percentage, and the total it produces is set when the finance is written. The multiplier is applied once, to the amount advanced, so the cost does not grow or shrink with the balance as repayments are made.

A factor rate is not an annual rate. It describes the whole cost across the whole term, whatever that term is, so the same factor rate costs more per year on a shorter term than on a longer one. That is why a factor rate on its own says little about what a working capital loan really costs, and why it cannot sit beside an interest rate until it has been converted. The conversion is set out in the factor rate to APR worked example.

A factor rate is a pricing term. It is unrelated to factoring, which is a form of invoice finance where a business borrows against, or sells, its unpaid invoices. The two share a word and nothing else.

The measure built for putting differently priced offers side by side is the annual percentage rate.

Next step

If you are weighing an offer priced with a factor rate, we can set it out as a total repayable and a yearly cost before you commit. Start with working capital loans, or call 0483 980 567.

FAQs

Is a factor rate the same as an interest rate?
No. An interest rate is charged over time on the balance owed, while a factor rate fixes the total cost as a multiple of the amount advanced. To compare the two, the factor rate has to be converted into an annual percentage rate first.
Why does a shorter term make the same factor rate cost more?
Because the total repayable does not change with the term. Repaying the same total over fewer months packs the same cost into less time, so the yearly cost rises. The effect is shown in the factor rate to APR worked example.
Do you save anything by repaying a factor rate loan early?
Often not. The total repayable is set at the start, so paying early does not reduce it unless the agreement provides a discount for early payout. Read the payout terms before signing, as explained in paying out a flat fee business loan early.