If you've ever stared at one offer quoting a "1.30 factor rate" and another quoting "28% APR" and felt like you were comparing apples to escalators, you're not alone. These two numbers measure cost in completely different ways, and lenders rarely translate between them for you. This guide gives you the math, the worked examples, and a simple framework to put every offer on the same scale.
What a factor rate actually is
A Factor Rate is a flat multiplier applied to the amount funded. You see them most often on revenue-based financing, merchant cash advances, and some short-term products. The math is deliberately simple:
- Funded amount × factor rate = total repayment
- $50,000 × 1.30 = $65,000 owed
- Cost of capital = $15,000
Notice what's missing: time. The factor rate doesn't change whether you repay in 4 months or 14. That's the trap. The $15,000 cost feels reasonable spread over a year — but if the lender pulls daily or weekly payments and you're done in five months, you paid $15,000 to use the money for less than half a year.
What APR actually is
Annual Percentage Rate (APR) expresses cost as a yearly percentage that accounts for both interest and the timing of payments. It's the standard for business term loans, SBA loans, and most bank products. APR is amortization-aware: as you pay down principal, you owe interest only on the shrinking balance.
That's the core difference. With a factor rate, the cost is locked in regardless of how the balance declines. With APR, paying down the balance reduces what you owe. This is why a 1.30 factor rate and a "30% APR" are not the same thing — the factor rate is almost always more expensive in true annualized terms.
Converting a factor rate to APR (worked examples)
Here's the practical method:
- Total cost = (funded amount × factor rate) − funded amount
- Simple periodic cost = total cost ÷ funded amount
- Annualize, then adjust for the fact that you don't hold the full balance the whole time
The shortcut most owners miss: because you repay a factor-rate advance in small frequent installments, your average outstanding balance is roughly half the original. That nearly doubles the effective APR compared to a naive calculation.
Let's run $50,000 at a 1.30 factor rate ($15,000 cost) across different terms:
| Repayment term | Simple cost | Naive annualized | Approx. true APR* |
|---|---|---|---|
| 12 months | 30% | ~30% | ~55% |
| 9 months | 30% | ~40% | ~73% |
| 6 months | 30% | ~60% | ~107% |
| 4 months | 30% | ~90% | ~160% |
*Approximate, amortization-adjusted. Actual APR depends on exact payment schedule and any fees.
The headline factor rate (1.30) never moved — but the true cost of borrowing ranges from roughly 55% to 160% APR depending purely on speed. That's the single most important thing to understand about Total Cost of Capital.
Don't forget fees, holdbacks, and prepayment
The factor rate is rarely the whole story. Layer in these and the real cost climbs further:
- Origination Fee: A 2–5% fee deducted up front means you receive less than the funded amount but still repay the full factored total. On a $50,000 advance, a 3% fee nets you $48,500 — but you still owe $65,000.
- Holdback / payment frequency: On revenue-based products, a Holdback is the fixed percentage of daily or weekly revenue the lender collects. A higher holdback shortens the term and raises your effective APR.
- No prepayment savings: With most factor-rate products, paying early doesn't reduce the $15,000 cost — it's baked in. Confirm in writing whether any prepayment discount exists.
- Invoice factoring is different: With invoice factoring, cost is usually a factoring fee per invoice over time, not a single factor multiplier. Compare it on a per-invoice and annualized-fee basis. (See our invoice factoring guide.)
Putting offers side by side
Here's how to make any two offers comparable. Convert everything to two numbers: total dollars paid and true APR.
| Metric | Offer A (factor rate) | Offer B (term loan) |
|---|---|---|
| Amount funded | $50,000 | $50,000 |
| Cost structure | 1.30 factor | 24% APR |
| Term | 6 months | 18 months |
| Fees | 3% origination | 2% origination |
| Net cash received | $48,500 | $49,000 |
| Total repaid | $65,000 | ~$59,300 |
| True APR | ~107% | ~28% |
Offer A's "1.30" looks tame next to "24% APR" — but it costs nearly four times as much per year of borrowing. That said, factor-rate products fund faster and approve borrowers a bank term loan won't, so the right answer depends on speed, qualification, and how the cash gets used. For a deeper breakdown of structures, see our guide to how business loan interest rates work and MCA vs. revenue-based financing.
How to compare offers without doing the math yourself
The fastest way to avoid the factor-rate trap is to get multiple offers and force them onto the same scale. That's what a financing marketplace does: you submit one application, lenders compete, and you can request each offer's term, fees, and total repayment so you can compute true APR side by side.
EQ Funding isn't a lender — we route one application to a network of lenders who compete to fund your business across revenue-based financing, term loans, invoice factoring, and more. Your job is simply to demand the two numbers that matter — total dollars repaid and true APR — and pick the offer that wins on cost and fit.
Bottom line: never compare a factor rate to an APR at face value. Convert the factor to dollars, factor in the term and fees, annualize it, and only then decide. A 1.30 isn't "30%" — and knowing the difference can save you tens of thousands of dollars.