If you’ve taken out a short-term business loan, or if you’ve applied for a merchant capital advance lately, there’s a good chance you’ve come across the term “factor rate” in some capacity.
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A factor rate (or money factor) is a way of expressing the amount of interest that a bank or alternative lender charges on a loan. Confusion can sometimes arise when comparing factor rates to interest rates or to an annual percentage rate (APR.) Find the answer to this question below, as well as everything else you need to know when considering how factor rates can affect how you finance your business.
The good news here is that a factor rate operates more simply than an interest rate. A factor rate is a percentage (often expressed as a decimal ranging from 1.1 to 1.9) that shows how much “extra” you owe on a loan. For example: if you’ve taken out a short-term loan for $1,000 and your factor rate is 1.21, multiply the two numbers together to arrive at the “true” amount of money you’ll have to pay back on the loan. (In this instance it’s $1,210.) Piece of cake.
Unlike interest rates, which can compound as you pay off your loan and change as your debt decreases, factor rates apply only to the original loan number.
So, considering our example before, if you borrow $1,000 and the factor rate is 1.21, the factor rate will remain 1.21 until the debt is paid off completely. Always be aware that factor rates don’t change like interest rates and so they need to be calculated differently when assessing your APR.
Note that APR is an expression of the total you owe on a given loan, including other fees and payments not relating to your factor rate. However, you can use your money factor to determine your APR, should you be so inclined.
Now that you’ve got a stronger grasp of what factor rates are, you might be wondering what they mean to your business. As stated before, factor rates often appear when you apply for a short-term loan or get a cash advance from a lender.
And it’s important to remember that when you consider your financial options. You should also recognize that the amount of the loan, your business’s credit history, how long you’ve been conducting business, and many other aspects of your situation can affect the factor rate on your loan. And obviously, the lower the factor rate, the better it is for you!
Looking to get cash quick to seize an opportunity for your company? Contact the National Business Capital & Services team today! We can answer your questions and put your mind at ease with the funds you need to get the most out of your business.
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