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A factor rate is a multiplier, not an interest rate
A factor rate is a multiplier, not a percentage. Here is the arithmetic on a real $75,000 deal, and why a 1.32 factor is nowhere near 32 percent a year.
A factor rate is a multiplier. You take the amount funded, multiply by the factor, and that is the total you owe. It does not compound, it does not accrue, and it usually does not shrink when you pay early. It is the simplest pricing in business finance and the easiest to misread.
The misread is always the same. An owner sees 1.32 and hears "32 percent." Thirty two percent sounds like a credit card. It is not a credit card. On a typical advance term, a 1.32 factor prices out somewhere near 86 percent a year, and this page shows you the arithmetic that gets you there.
The arithmetic, on a real deal
Take $75,000 funded at a 1.32 factor. Multiply. You owe $99,000. That is the whole calculation, and it is finished the second you sign. The $24,000 difference is your cost of capital, and it is a fixed dollar amount, not a rate that runs while the money is out.
Now add the schedule, because the schedule is what turns a multiplier into a real price. Say the deal runs 176 business days, which is roughly eight calendar months. Divide $99,000 by 176 and the debit is $562.50 every business day. About $12,206 leaves your account every month. Whether your business can survive that number is a completely different question from whether 1.32 sounds reasonable.
- Amount funded
- $75,000
- Factor rate
- 1.32
- Total payback
- $99,000, fixed at signing
- Cost of capital
- $24,000
- Payments
- 176 business days at $562.50
- Monthly cash out
- About $12,206
- Approximate APR
- About 86 percent nominal
Why 1.32 is not 32 percent
Two things separate a factor from an interest rate, and both of them work against you.
The first is time. Thirty two percent of $75,000 is $24,000 no matter how long you hold the money. But you are not holding it for a year. You are holding it for eight months. A cost you pay in eight months is worth more per year than the same cost paid over twelve, so the annualized figure has to go up, not stay flat.
The second is amortization, and this is the one that surprises people. You never have $75,000 for eight months. You start paying it back the next business day. By month four you are carrying about half the balance and still paying the same $562.50. The average amount of money you actually had use of over the life of the deal is closer to 55 percent of what was funded. You paid $24,000 for the use of roughly $41,000, not $75,000.
Put those together and the annualized cost roughly doubles the headline. If you want the step by step conversion with a spreadsheet formula you can check yourself, read how to convert a factor rate to an APR.
What the same $75,000 costs at different factors
Factors are not quoted in tiny increments. The spread between a good file and a hard one is enormous in dollar terms, which is why cleaning up your bank statements before you apply is worth more than any negotiating tactic.
| Factor rate | Total payback | Cost of capital | Cost per $10,000 borrowed |
|---|---|---|---|
| 1.15 | $86,250 | $11,250 | $1,500 |
| 1.25 | $93,750 | $18,750 | $2,500 |
| 1.32 | $99,000 | $24,000 | $3,200 |
| 1.40 | $105,000 | $30,000 | $4,000 |
| 1.49 | $111,750 | $36,750 | $4,900 |
Seventeen points of factor, from 1.32 to 1.49, is $12,750 out of your bank account. That is a used truck. It is also, frequently, the entire difference between a file with four negative days and a file with none. See how underwriters read bank statements for what actually moves that number.
What sets your factor in the first place
Nobody negotiates a factor down by asking nicely. It is an output of the file. These are the inputs that move it, roughly in order of weight.
- Average daily balance. The single strongest driver. A business that ends most days near zero is a business that cannot absorb a missed week, and it gets priced that way. See average daily balance.
- Time in business. Under twelve months narrows the field to a handful of funders, and a narrow field prices worse.
- Existing positions. One open advance moves you to second position and adds several points. Two open positions usually ends the conversation.
- Deposit consistency. Thirty deposits a month reads like an operating business. Three large wires reads like customer concentration.
- Negative days and NSF items. A handful is survivable. A pattern is a repricing event.
- Industry and state. Some industries carry a standing risk grade. Some states restrict what a funder can enforce, which changes what they will charge.
- Term. A longer term at the same risk always carries a higher factor, because the funder is exposed for longer. This is real, not a markup.
The part of the factor that is not the funder
There are two factors on most advance deals. The buy rate is what the funder needs back. The sell rate is what you sign. The difference is broker compensation, and it is built into the multiplier rather than billed separately, which is exactly why it is easy to miss.
If a funder's buy rate on your file is 1.26 and the paperwork says 1.32, six points of factor on $75,000 is $4,500 of commission living inside your payback. That is not automatically wrong. Somebody has to do the work of packaging and placing the file. It is only wrong when nobody will tell you it is there. Read what a buy rate is and how brokers actually get paid before you sign anything.
Where a factor rate is honestly the right structure
Fixed pricing has a real virtue: there is exactly one number to evaluate. No variable rate, no compounding, no surprise reset in month nine. If you know the total payback and the daily debit, you know your entire obligation, which is more than most bank borrowers can say about a variable line.
It works when the money buys something that pays back faster than the money costs. Inventory at a real discount. A job you can only take if materials land this week. A truck back on the road. It fails when it is used to cover a monthly loss, because then you have added a $562.50 daily debit to a business that was already short, and you have shortened the runway rather than extended it.
A factor rate is not expensive or cheap. It is expensive or cheap relative to what the money is about to earn.
What we do with this
Exp Capital Solutions is a broker. We do not fund advances, we do not set factor rates, and we do not approve anything. What we do is take one clean file, put it in front of the funding partners most likely to price it well, and then show you the offers side by side with the total payback, the daily debit, and the approximate APR written out for each one. If a line of credit or a term loan fits your file, we will say so, even though those pay us less than an advance does.