Educational content only. Not financial, legal, or tax advice. Examples are illustrative. Terms, eligibility, and costs vary by provider and deal.
Two numbers doing two different jobs
When you compare funding offers, you will hear a factor rate from one provider and an APR from another. They are not competitors, and they are not interchangeable. One tells you what you will repay. The other tells you what the money costs per year, accounting for time.
Confusing them is the most common pricing mistake business owners make. It is also the mistake some offers are designed to encourage.
What a factor rate actually is
A factor rate is a flat multiplier applied to the amount funded.
- Factor 1.30 on $50,000 → $65,000 total repayment → $15,000 cost
- Factor 1.35 on $50,000 → $67,500 total repayment → $17,500 cost
- Factor 1.20 on $50,000 → $60,000 total repayment → $10,000 cost
That's the whole mechanism. It doesn't change based on how fast you pay, and it doesn't tell you anything about annualized cost until you know the collection schedule. A "1.35" is not "35% interest," but it also isn't a discount — it's a flat cost on the principal for the life of the deal.
Why APR looks so different
APR is an annualized rate. It accounts for both cost and time, which is why a factor rate and an APR can describe the same deal while looking nothing alike.
Here's the intuition: if you pay a $15,000 cost over six months, that's $30,000 per year on a $50,000 balance on an annualized basis. If you pay the same $15,000 over eighteen months, the annualized cost is a third of that. Same flat cost, radically different APR.
Illustrative approximation: a 1.30 factor collected over six months works out to an annualized cost in the roughly 60% range; collected over twelve months, the same factor lands closer to 30%. These are approximations for comparison, not quoted rates — providers calculate APR differently, and fees shift the number.
This is why fast money is expensive money. The provider's capital is committed for a short period, so the cost of that capital concentrates.
The comparison that actually matters
When two offers are on the table, compare them on the same five inputs:
| Offer A | Offer B | |
|---|---|---|
| Net amount deposited | ||
| Total repayment | ||
| Cost of capital (total − net) | ||
| Debit amount and frequency | ||
| Length of repayment window |
Fill both columns in dollars. If a provider can only give you a factor rate and a term, ask for total repayment in writing and calculate the cost yourself. Any provider who resists putting a total dollar figure in writing is telling you something important about how they sell.
A practical habit: compare cost per $10,000 borrowed across offers. It normalizes different amounts and makes the pricing visible at a glance.
The three places pricing hides
1. Fees added to the balance. Origination, underwriting, "program," or administrative fees can be financed into the repayment rather than billed separately. That raises your real cost without changing the factor rate you were quoted. Ask whether the factor applies to the funded amount or the funded amount including fees.
2. Collection frequency. Daily collection means the balance is recovered faster than weekly or monthly, which raises the annualized cost and increases pressure on your account. Two offers with identical factors and different cadences are not the same deal.
3. Renewal terms. A renewal can reset the clock, add a new total payback, and extend your obligation — sometimes before the original balance is meaningfully paid down. That's not automatically bad, but it must be evaluated as a new deal with its own numbers, not as a continuation.
What to ask, in writing, before you compare
- What is the exact net amount deposited to my account?
- What is the total repayment in dollars, including every fee?
- What is the payment amount and how often is it collected?
- Is the payment fixed, or does it adjust with revenue?
- What is the estimated APR equivalent, and how did you calculate it?
- What happens if deposits dip or a payment is missed?
Questions 1 through 3 are arithmetic. Questions 4 through 6 are the ones that decide whether the deal behaves the way you expect when your business has an ordinary bad month.
The honest summary
Factor rate tells you what you'll owe. APR tells you what the money costs per year. You need the first to budget and the second to compare. Neither is a substitute for the third thing that actually decides whether a deal is safe: the debit measured against your conservative daily revenue.
If a broker or funder won't give you all three in writing, you don't have enough information to say yes, no matter how good the headline sounds.
Next steps
See what any factor rate and term do to your daily payment: run the numbers in the MCA calculator.
Related guides:
- Unsecured Working Capital: How to Get Funded Without Collateral
- The Three Numbers to Check Before You Sign Any Advance
- How to Read Your Own Bank Statements Like an Underwriter
Clutch Advance publishes educational content about business funding. Nothing here is financial, legal, or tax advice, and nothing here is a commitment to fund. Terms, eligibility, and costs vary by provider and by deal. Review any agreement with a qualified professional before signing.