What is the difference between a factor rate and an interest rate (APR) on business funding?

Short answer: An interest rate or APR expresses cost as a yearly percentage of the balance you owe, while a factor rate is a multiplier applied once to the amount you receive. Because a factor rate does not account for how quickly you repay, it can look lower than an APR even when the cost is higher. The fairest way to compare offers is by total dollars repaid, fees, payment frequency, and term.

What an interest rate and APR mean

An interest rate is the yearly cost of borrowing, charged on the balance you still owe. As you pay down the balance, the interest portion usually shrinks.

APR (annual percentage rate) aims to show the yearly cost including certain fees, not just interest. It makes it easier to compare loans with different fee structures.

What a factor rate means

A factor rate is a decimal multiplier, often used with revenue-based funding and merchant cash advances (MCAs). You multiply the amount funded by the factor rate to get the total payback.

Example (for illustration only): If you receive $10,000 with a factor rate of 1.3, you repay $13,000. The $3,000 cost is fixed up front. It does not shrink if you pay faster, in most agreements.

Why you cannot compare them directly

A factor rate of 1.3 might look like "30%," but that is not an annual rate. If the $13,000 in the example is repaid over a few months instead of a year, the effective annual cost is much higher than 30%. The shorter the repayment period, the bigger the gap.

Ask any funder for an estimated APR if it is not shown, so you can compare it with loan offers.

How to compare funding offers in five steps

1. Write down the amount you will actually receive after any fees taken at closing.
2. Write down the total amount you will repay, including all fees.
3. Note the payment amount and frequency (daily, weekly, monthly).
4. Note the expected term. How long until it is paid off?
5. Ask about early payoff. Does paying early reduce your cost, or is the full amount owed regardless?

Put each offer into a simple table with these five items. The cheapest-looking rate is not always the cheapest offer.

Fees to look for

• Origination or underwriting fees
• Draw fees on lines of credit
• Administrative or processing fees
• Late or returned-payment fees
• Prepayment penalties

Questions to ask any funder

• What is the total amount I will repay?
• What is the estimated APR?
• How often are payments taken, and how much is each one?
• Is there any discount or penalty for paying early?
• What happens if my sales slow down?

FAQ

Is a factor rate the same as an interest rate?

No. A factor rate is a one-time multiplier on the amount funded. An interest rate is charged over time on the remaining balance.

Is a lower factor rate always a better deal?

Not necessarily. A low factor rate on a very short term can cost more per year than a higher rate on a longer term. Compare total cost and term together.

Why do some funders use factor rates?

Many revenue-based products are structured as a purchase of future receivables rather than a loan, and the cost is commonly quoted as a factor rate.

Can I see offers from different funders side by side?

Yes. A marketplace application lets you compare several offers at once.

Compare offers clearly with Pro Capital

Pro Capital is a small business funding marketplace. One application lets you see options from multiple funders so you can compare total cost, payments, and terms before you choose. Applying is free and has no credit impact. Approval and terms depend on each funder's review.

Start your free application. Pro Capital: Funding Made Simple.