A factor rate has no time in it. 1.35 means the merchant repays $1.35 for every dollar advanced, and nothing about that number tells you whether it is expensive — six months and eighteen months at the same factor are entirely different deals. Annualising is what makes an advance comparable to anything else on the table, and it is what California and New York now require in writing.
Typically 1.15–1.50. Below 1.2 is strong paper; above 1.45 is usually a later position.
IRR-derived, annualised. What a lender would have to charge to be equivalent.
Cost over advance, scaled to a year. Ignores the declining balance.
35¢ on every dollar advanced.
Business days. Weekends and holidays do not debit.
The two rates differ because the simple figure pretends the merchant holds the full advance for the whole term. They do not — they start repaying the next business day. The APR line is the honest comparison against a bank quote, and it is roughly double the simple number for any typical advance.
A 1.35 factor rate repaid daily over six months works out to roughly 126% APR — about double the 70% you get from the simple cost-over-advance calculation, because the merchant starts repaying the next business day rather than holding the full advance for the term.
Repaid daily over six months on a $50,000 advance, roughly 126% APR. Over twelve months at the same factor it falls to about 63%, and over three months it rises to about 250%. The factor alone does not determine the rate — the term does at least as much work.
Because repayment starts immediately. A merchant taking $50,000 at 1.35 never has $50,000 for six months; the average outstanding balance across the term is closer to half that, so the same dollar cost is earned on half the money. That is the whole gap between the simple number and the APR.
It is the right way to compare one against a loan, which is the comparison merchants actually make. It is a poor description of the product itself, because an advance has no fixed term — that is why Utah and Georgia legislated against requiring one, and why California and New York require one anyway.
California and New York require an estimated annualised rate in their commercial financing disclosures. Georgia expressly does not, and Utah chose a dollar-cost disclosure instead. The other disclosure states are built around total cost and the payment schedule.
Factor rate
A multiplier applied once to an advance amount to give the total repayment — a $50,000 advance at 1.40 means $70,000 repaid.
APR
The annualised cost of financing, accounting for the repayment schedule as well as the amount charged.
Total payback
The full amount a merchant repays, calculated as the advance multiplied by the factor rate.
Holdback
The percentage of daily card sales or bank deposits a funder takes until the advance is repaid.
Commercial financing disclosure law
State legislation requiring standardised cost disclosures to a business before it signs a financing agreement.
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