Factor Rate to APR: A Worked Conversion Example
A factor rate is not an interest rate. One worked conversion to an annualised cost, at two terms and two repayment frequencies, with assumptions stated.
Business Owners Hub
Factor Rate · Annualised Cost · Business Finance
One lender quotes 1.2. Another quotes a rate. They are not the same measure and they are not comparable until you convert one into the other. Here is a single conversion run end to end, under a stated assumptions block, at two terms and two repayment frequencies.
Quick Answer
A factor rate is a multiplier, not an interest rate, so it has to be converted before two offers can be compared. Then check that simple figure against the rate the actual repayment schedule implies, which on short term working capital finance is usually much higher.
Also called: factor rate conversion, flat fee to annual percentage rate, annualised cost of a business loan.
How do you convert a factor rate to APR?
To convert a factor rate to an annualised figure, divide the cost of credit by the amount advanced, divide that result by the term in days, then multiply by 365. That is the simple annualised figure, and it is the conversion published almost everywhere this question is answered. It is a legitimate number and it is not the whole answer, which is why the second section of this page exists.
Before any figure means anything it needs the assumptions sitting beside it, so here are the ones every number on this page is computed from.
Assumptions used for every figure on this page
- Amount advanced $50,000.
- Factor rate 1.20, so the total repayable is $60,000 and the cost of credit is $10,000.
- Terms of 12 months (365 days) and 6 months (182 days).
- Repayment frequencies of weekly and monthly, repayments in arrears.
- No fees inside the worked example. Section five covers where fees would sit.
- This is an illustrative example, not a quote, not an offer, and not a rate available from any lender.
| Step in the conversion | 12 month term (365 days) | 6 month term (182 days) |
|---|---|---|
| Amount advanced | $50,000 | $50,000 |
| Factor rate | 1.20 | 1.20 |
| Total repayable | $60,000 | $60,000 |
| Cost of credit | $10,000 | $10,000 |
| Cost divided by amount advanced | 0.20 | 0.20 |
| Divided by term in days, multiplied by 365 | 20.0 per cent | approximately 40.1 per cent |
So the same $10,000 of cost annualises to 20 per cent over a year and to roughly twice that over half a year. Nothing about the offer changed. Only the time you have the money did.
No Australian regulator sets a method that every business lender must use to express a factor rate as an annual percentage rate, and none was found in the sources checked on 21 September 2026. The closest instrument is a voluntary industry code, the Australian Finance Industry Association's Online Small Business Lenders Code of Lending Practice, which gives borrowers a standard pricing comparison tool and a loan summary sheet before a loan is accepted. It binds the lenders that have signed it, not the market, so outside that group the arithmetic is yours to do. The definitional entry sits at factor rate.
Why does a simple annualised figure understate a short term loan?
A simple annualised figure understates this product because you never hold the full amount advanced for the full term. The repayments start within days, so the balance falls from the first week, while the cost of credit stays fixed at the figure set on day one.
Run the 12 month weekly schedule from the assumptions above and the average balance outstanding across the 52 repayments is approximately $27,000, not $50,000. The same $10,000 is being charged on a little over half the money the simple calculation assumes you have, which is the amount your cashflow is actually carrying.
The figure that reflects it is the rate that makes the repayment schedule equal the amount advanced, computed on the actual dates and then annualised. On the 12 month weekly schedule that is approximately 37.0 per cent against the simple 20.0 per cent, so roughly 1.8 times larger. Both numbers are honest and they measure different things, which is why this page labels every one of them. The simple figure should not be called an annual percentage rate, because an annual percentage rate is meant to describe the cost of the money you still owe. The label matters to the regulator too: ASIC treated a repayment calculator whose annual percentage rate sat well below the rate most borrowers actually paid as potentially misleading, in a consumer credit matter (media release 23-028MR, read 21 September 2026).
What changes when the same factor rate runs over a shorter term?
Halving the term roughly doubles the annualised cost, because the cost of credit is fixed in dollars and the time is not. This is the result that surprises borrowers most, and in deals I have seen it is the reason a shorter term gets chosen for the wrong reason: the repayments look higher but the total looks the same, so the term reads as free.
| Term and frequency | Each repayment | Simple annualised figure | Annualised cost on the actual schedule |
|---|---|---|---|
| 12 months, monthly (12 repayments) | $5,000.00 | 20.0 per cent | approximately 35.1 per cent |
| 12 months, weekly (52 repayments) | $1,153.85 | 20.0 per cent | approximately 37.0 per cent |
| 6 months, monthly (6 repayments) | $10,000.00 | approximately 40.1 per cent | approximately 65.7 per cent |
| 6 months, weekly (26 repayments) | $2,307.69 | approximately 40.1 per cent | approximately 72.8 per cent |
Read down the third column and the term alone moves the simple figure from 20.0 per cent to approximately 40.1 per cent. Read down the fourth and the same halving moves the schedule figure from approximately 35.1 per cent to approximately 65.7 per cent. The dollars never moved. If the shorter term is being offered because it is easier to approve, that is a different conversation from the one the pricing is having, and the worked repayment tables in repayments on a $50,000, $100,000 or $200,000 business loan show the same effect at three loan sizes. The arithmetic is the same on every working capital loan priced this way.
What happens to the annualised cost when repayments come out weekly?
On a flat fee or factor rate loan, weekly repayments raise the annualised cost rather than lowering it. Compare the first two rows of Table 2: the same $60,000 total, the same $10,000 cost, and the annualised cost on the schedule moves from approximately 35.1 per cent monthly to approximately 37.0 per cent weekly. Over the six month term the same switch moves it from approximately 65.7 per cent to approximately 72.8 per cent.
This is the opposite of the answer almost every Australian source gives, and the reason is that the answer was written for a different product. Both answers are correct inside their own pricing shape.
- On an amortising loan priced with a rate, more frequent repayments reduce the balance faster, interest accrues on less money and you genuinely pay less in total. This is the mortgage answer and it is right for mortgages.
- On a flat fee or factor rate loan, the total repayable was fixed the day the money landed. Repaying more often returns the money sooner without reducing a single dollar of cost, so the annualised cost goes up.
Weekly repayments are not a trap in themselves and many businesses prefer them because they match takings. The point is only that on this pricing shape they are a cash flow decision, not a saving, and anyone selling them to you as a saving on working capital finance is describing the wrong product.
Which fees belong inside the conversion and which sit outside it?
Any fee that is known in dollars before you sign belongs inside the conversion, and any fee that depends on something that has not happened yet belongs outside it, named rather than guessed. The worked example above carries no fees at all, which is stated in the assumptions, because adding an unstated fee to a published table is how a comparison stops being one.
Establishment and origination fees go inside. They are set at the start, they are deducted from or added to the amount advanced, and leaving them out understates the cost of every offer that charges them. A common case is an establishment fee deducted from the advance, so the business receives less than the figure the conversion is computed on, which raises the real annualised cost again.
Dishonour fees, late payment fees and any adjustment on early payout stay outside, named and unpriced, because they depend on conduct rather than on the contract's arithmetic. A conversion that includes a guess at them is no longer comparable with the next lender's. The cost side of this sits in the working capital loan costs guide, and the broader set of facilities is covered under business loans.
One structural point worth knowing while you read any of these documents: business purpose credit sits outside the National Credit Code, so the consumer disclosure, responsible lending and hardship rules do not apply to it.
What should you ask a lender so two offers can actually be compared?
Ask for four things in writing, and ask for them before you choose, because every one of them is easy to supply at quote stage and awkward to extract later. None of them requires the lender to publish a rate it does not quote.
| What to ask for | Why it decides the comparison | What a clear answer looks like |
|---|---|---|
| The total amount repayable, in dollars | It is the only figure that is the same measure across both pricing shapes | A single dollar figure, stated as the total including all known fees |
| The full repayment schedule | The annualised cost cannot be computed without the dates and the frequency | Number of repayments, size of each, frequency, first and last date |
| Every fee, and whether it is inside that total | An establishment fee deducted from the advance changes the conversion | Each fee named, priced where it is knowable, marked inside or outside the total |
| Whether the total changes if you repay early | It decides whether an early exit saves anything at all | A direct statement referring to the clause, not a general assurance |
With those four answers from two lenders you can run the conversion on this page twice and compare the results on the same basis. Whether an early payout actually saves you anything is a separate question with its own answer, set out in paying out a flat fee business loan early. If the security being discussed is property rather than trading performance, the assessment is a different one again and starts at the property lending hub.
A factor rate and an interest rate are not the same measure, and the gap between them is not small. On the stated assumptions the same $10,000 of cost reads as 20.0 per cent, as approximately 37.0 per cent, or as approximately 72.8 per cent, depending only on the term, the repayment frequency and which of the two annualisations you are shown. All three are arithmetically correct. The one that describes what you pay is the one computed on the repayment schedule you were actually offered.
Key takeaway: get the total repayable and the full repayment schedule in writing from both lenders, then annualise both yourself before you compare them.Frequently Asked Questions
Converting a factor rate to an annualised figure starts by multiplying the amount advanced by the factor rate to get the total repayable, subtracting the amount advanced to get the cost of credit, dividing that cost by the amount advanced, dividing again by the term in days and multiplying by 365. That gives the simple annualised figure, which is the one most widely published. Both figures apply across the short term facilities written as business loans.
The difference between an annual percentage rate and a factor rate is that one is a rate over time and the other is a fixed multiplier that does not move with time at all. A factor rate fixes the total repayable at the moment the money lands, so repaying sooner returns the money without reducing the cost. How that pricing shape compares with an advance against card takings is answered in merchant cash advance against a working capital loan.
The same factor rate costs more on a shorter term because the cost of credit is fixed in dollars while the time you have the money is not. A factor rate of 1.20 on the stated assumptions produces the same $10,000 cost whether the loan runs six months or twelve, so halving the term roughly doubles the annualised figure. See how short term business loans work.
Paying weekly instead of monthly changes the annualised cost on a flat fee or factor rate loan, and it raises it rather than lowering it. On an amortising loan priced with a rate the opposite is true and weekly repayments genuinely reduce the interest paid, which is why the generic answer to this question misleads on the short term facilities set out in the business owners finance hub.
A factor rate and a flat fee are two ways of writing the same arithmetic: both fix the cost of credit in dollars at the start and neither reduces as the balance falls. A factor rate expresses it as a multiplier on the amount advanced, while a flat fee expresses it as a percentage of the amount advanced or as a dollar figure. Where the facility is secured against property rather than trading performance the answer differs again, and that assessment starts at the property lending hub.
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