The short answer
A factor rate is a multiplier applied once to the advance amount to give the total repayment. A $50,000 advance at 1.40 means $70,000 is repaid — a $20,000 cost, full stop. It is not an interest rate, because it does not compound and does not shrink as the balance falls. The same deal expressed as APR is far higher than the factor implies, and the shorter the term, the wider that gap.
Factor rates confuse people because they look like interest rates and behave nothing like them. A merchant seeing 1.4 next to a bank quoting 12% will assume the first is better, and a broker who does not head that off spends the call correcting it.
How the maths works
Multiply the advance by the factor. That is the total repayment. There is no amortisation, no declining balance and no early-repayment saving unless the contract specifically provides one.
| Advance | Factor | Total repaid | Cost |
|---|---|---|---|
| $25,000 | 1.25 | $31,250 | $6,250 |
| $50,000 | 1.35 | $67,500 | $17,500 |
| $50,000 | 1.45 | $72,500 | $22,500 |
| $100,000 | 1.30 | $130,000 | $30,000 |
The cost is fixed the moment the deal is signed. Repaying faster does not reduce it — it concentrates the same cost into less time, which raises the effective rate rather than lowering the bill.
Why the APR is so much higher
APR annualises the cost and accounts for the fact that the merchant repays continuously rather than at the end. Because the balance falls throughout, the merchant has use of less money over time than the headline suggests, and a short term compresses the whole cost into a small window.
The same 1.35 factor at three terms
What to say when a merchant asks which is real
Both are real and they answer different questions. The factor tells them what they will pay in total. The APR tells them what the money costs relative to other financing. A merchant comparing an advance to a bank line needs the second number, and increasingly the law agrees — several state disclosure regimes require a rate expressed in comparable terms.
What actually drives the factor
- Time in business. Longer trading history reduces the funder’s risk and the factor with it.
- Revenue consistency. Steady deposits price better than the same average arrived at through wild swings.
- Existing positions. Every open advance ahead of yours raises the factor on the next one.
- Industry. Some verticals carry higher default rates and price accordingly.
- Term. Shorter terms often carry lower factors and higher effective cost, which is the trade merchants least expect.