Factor Rate vs. APR: Reading a Funding Offer Honestly
The short answer
A factor rate tells you total cost but ignores time. The same 1.25 factor is dramatically more expensive over 6 months than over 18, so always convert to an annualised figure before comparing offers.
Revenue-based funding is usually quoted as a factor rate: borrow $100,000 at a 1.25 factor and you repay $125,000. It is a clear number. It is also incomplete, because it says nothing about how long you have to repay it.
The conversion
Total cost is straightforward: advance amount multiplied by the factor, minus the advance. On $100,000 at 1.25 that is $25,000. To make it comparable, spread that cost across the actual repayment term and annualise it. Because you repay continuously rather than at the end, the effective annualised cost is roughly double the simple figure.
- $100,000 at 1.25 over 18 months — roughly 33% effective annualised.
- $100,000 at 1.25 over 12 months — roughly 50%.
- $100,000 at 1.25 over 6 months — roughly 100%.
Why shorter is not automatically worse
A short, expensive advance used to buy inventory that turns over twice in that window can be an excellent trade. A long, cheap advance used to cover a structural shortfall is a bad one. The annualised number tells you the price; only you can tell whether the use of funds beats it.
What to ask for in writing
- Total repayment in dollars.
- Expected term in months at your current revenue.
- All fees, itemised.
- The early-payoff discount, stated as a number.
Any funder unwilling to put those four in writing has told you something useful.