business loan factor rate

What Does “Factor Rate” Mean?

  • August 11th, 2016
  • Tyler Heaps

You might turn to a business cash advance, sometimes called a merchant cash advance, if your small business is in need of a short-term loan to produce working capital quickly or increase cash flow. You may also choose to take a short-term business loan. All of these alternatives carry a business loan factor rate, which we will be discussing in this article.

Unlike interest rates, which are expressed in percentages, factor rates are usually given in decimal figures. Some lenders will give you the factor rate as a percentage. Factor rates usually vary from 1.1 to 1.5. The rate you get will depend on the length of time you’ve been in business, your industry, the average of your monthly sales, and the stability of those sales.

You’ll need to calculate the total amount you need to repay in order to find the factor rate. Multiply the amount you need to borrow by the factor rate. If you’re borrowing $100,000 and the factor rate is 1.18 for a term of 12 months, you’ll need to repay a total of $118,000.

The factor rate is calculated by dividing the financing cost by the loan amount. You need to be aware that factor rates can make expensive loans appear cheaper. Also, you’re required to pay the interest up front, so paying off the loan early won’t save you interest charges.

We can’t stress this enough: factor rates are not the same as interest rates. Factor rates are calculated only once using the original loan amount. Interest rates are calculated multiple times and are based on the depreciating capital.

Factor rates are different from APR financing, in that at the beginning of the life of the loan or advance, the lender calculates all of the interest due, and works it into your scheduled payments. With APR, financing interest accrues on the depreciating principal amount, so your interest payments get smaller and smaller as you make more payments.

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Where Can I Find Short-Term Financing with a Low Business Loan Factor Rate?

Short-term financing with a low business loan factor rate is virtually impossible to find, but you can get competitive rates by using the Lendio business loan marketplace. After answering few questions about your business you will be matched with lenders who will best fit your business financing needs.

This financing can help your business through an emergency or a slump, and it can also help you to take advantage of snap opportunities. It’s not regarded as a feasible option for financing long-term growth, for example hiring new employees, or purchasing new equipment or space. Short-term financing is best used to purchase supplies, inventory, or other short-term business needs.

So what’s the difference between short-term and long-term financing? The principal amounts of short-term loans tend to be smaller, interest rates higher, the repayment period considerably shorter, and you repay the lender on a daily or weekly rather than a monthly schedule. They’re also faster to apply for, easier to qualify for, and quicker to fund.

The funding option that’s best for your business will ultimately depend on what it needs at any given time. We’ve discussed the circumstances under which a short-term loan may be more feasible, and also how to calculate its factor rate.

About the Author

  • Tyler Heaps

Tyler is a member of the Lendio marketing team. He is passionate about digital marketing, small business, and helping small business owners succeed. Tyler is an outdoorsman and loves spending time with his family.

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