Comparison

Factor rate vs interest rate: the differences that decide it.

A neutral side-by-side, with the arithmetic, so you can pick the structure that fits.

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The short version

A factor rate and an interest rate both describe a cost, but they are built on different arithmetic. Comparing them side by side without converting is the most common way to misjudge an offer.

What it isFactor rate: a multiplier on the amount advanced. Interest rate: a percentage charged per year on the balance.

When the cost is setFactor rate: fixed at signing. Interest rate: accrues over time on the outstanding balance.

Effect of paying earlyFactor rate: usually nothing, unless a discount is written in. Interest rate: interest stops accruing.

How to read itFactor rate: multiply to get total payback. Interest rate: use an amortization schedule.

AnnualizingFactor rate: depends on how long the money is outstanding. Interest rate: already annual.

Typical rangeFactor rate: roughly 1.10 to 1.50. Interest rate: varies by product.

Best comparisonAlways compare total dollars repaid and the repayment period.

A worked example

Illustrative arithmetic

A boutique retailer depositing about $50,000 a month asks for $30,000 for inventory. At a 1.2 factor the payback is $36,000, a cost of $6,000. Over roughly 6 months that is about $286 per business day, or close to 12% of monthly deposits.

Total payback on the advance: $36,000.
Cost: $6,000.
Roughly $286 per business day, or about 12% of monthly deposits.

Every figure on this page is illustrative arithmetic in Canadian dollars. It is not an offer, a quote or a promise of approval.

How to decide

Convert both offers into total dollars repaid for the same amount received.
Compare the number of months until the money is fully repaid.
Then compare how the payment behaves in a slow month.
Only then look at any annualized figure, as a rough guide.

Where people go wrong

Reading a 1.2 factor as 20% interest per year.
Assuming a factor rate falls if you repay early.
Ignoring fees deducted from the amount received.

Common questions

Is 1.25 expensive?

It is a 25% cost on the amount advanced. Whether that is expensive depends on how fast the money is repaid and what it earns you.

Can a factor be converted to APR?

Roughly, if you know the term, but the figure is only a guide for an advance.

Why do advances use factors?

Because the total is fixed at the outset, which is the nature of buying future receivables.