To calculate a factor rate, divide the total repayment amount by the funded amount; to work in the other direction, multiply the funded amount by the factor rate to get what you’ll owe. A factor rate of 1.30 on a $50,000 advance means $65,000 in total repayment. The math is simple. What the number hides is not, especially when you compare what looks like a 30 percent cost to the annualized rate you’d actually be paying.
The Two Numbers You Need From Your Agreement
Every factor rate calculation runs on two figures: the principal funding amount and the total repayment amount.
The principal is the cash deposited into your business account before any fees are deducted. On a financing offer it might be labeled “funded amount,” “advance amount,” or “purchase price.” The total repayment amount is your principal plus all fixed financing costs baked into the factor rate, usually shown in the payment schedule or near the top of the agreement as “total payback amount” or “total of payments.” Confirm both figures match what you were quoted. If the agreement shows a smaller funded amount than what was discussed, origination or administrative fees may have already been subtracted.
One thing you won’t find in the paperwork: a standardized APR box. Regulation Z explicitly exempts business, commercial, and agricultural credit from federal Truth in Lending disclosures, so the burden of running the numbers falls on you.1Consumer Financial Protection Bureau. 12 CFR 1026.3 – Exempt Transactions
The Formula
Divide the total repayment amount by the principal. That’s it.
If you receive $50,000 and your agreement says you owe $65,000 total, the factor rate is $65,000 ÷ $50,000 = 1.30. The result is always a decimal greater than 1.0, and in most alternative business financing it falls between 1.1 and 1.5. Closer to 1.1 means you’re paying about 10 percent on top of what you borrowed; closer to 1.5 means about 50 percent on top.
Unlike interest on a traditional loan, this decimal is locked in at signing. It doesn’t compound. It doesn’t fluctuate. And it doesn’t shrink if you pay early.
Calculating Total Repayment Cost
When a lender quotes you the factor rate up front, multiply it by the principal to find what you’ll owe. A $100,000 advance at a 1.28 factor rate: $100,000 × 1.28 = $128,000 in total repayment. The $28,000 difference is the fixed financing cost for that capital.
That total does not move based on how quickly you repay. Whether you finish in five months or stretch to twelve, the dollar amount is the same. The cost is predetermined the moment you sign.
Converting the Factor Rate to a Percentage Cost
To see the cost as a percentage, subtract 1 from the factor rate and multiply by 100. A factor rate of 1.35 becomes (1.35 − 1) × 100 = 35 percent. That 35 percent is the total cost of capital: the premium you pay for access to the funds, expressed as a flat percentage of the principal.
This number is useful for comparing two offers side by side. A 1.25 quote against a 1.35 quote is a 25 percent total cost against a 35 percent total cost. But this percentage is not an annual interest rate.
Why the Percentage Cost Is Not an APR
A 30 percent total cost sounds comparable to a 30 percent APR credit card. It is not. APR measures the annualized cost of borrowing, accounting for how long you hold the money. A factor rate just tells you the total markup regardless of term length. The shorter the repayment window, the higher the effective annual rate.
Here’s the conversion. Take the total financing cost as a decimal (factor rate minus 1), multiply by 365, and divide by the term length in days. For a $50,000 advance at a 1.30 factor rate repaid over 180 days: 0.30 × 365 ÷ 180 ≈ 60.8 percent annualized. A factor rate of 1.40 repaid over 90 days works out to roughly 162 percent annualized. That’s why comparing a factor rate directly to a bank loan’s APR without doing this conversion leads to very expensive misjudgments.
A handful of states, including California, New York, Virginia, and Utah, now require commercial financing providers to disclose an APR-equivalent figure alongside the factor rate. In 2024, the CFPB confirmed that these state disclosure laws are consistent with the Truth in Lending Act.2Consumer Financial Protection Bureau. CFPB Issues Determination That State Disclosure Laws on Business Lending Are Consistent With Truth in Lending Act If your state requires the disclosure, the APR figure should appear on your offer. If it doesn’t, run the conversion yourself.
Adjusting for Fees Deducted From Proceeds
The basic formula assumes you actually receive the full principal. In practice, many lenders deduct origination or administrative fees before funding. Origination fees on alternative business financing typically run between 1 and 9 percent of the advance amount. On a $100,000 advance with a 3 percent origination fee, you receive $97,000, but the factor rate still applies to the full $100,000.
That gap matters. At a 1.30 factor rate, you owe $130,000 in total repayment on $100,000, but you only received $97,000. Your real cost of capital is $33,000 on $97,000 of usable funds, or about 34 percent rather than 30. Check whether fees are deducted from proceeds or added on top, and recalculate using the money you actually receive.
Figuring Your Periodic Payment
Divide the total repayment amount by the number of scheduled payments to find each individual withdrawal. If you owe $128,000 over 250 business days, each daily payment is $128,000 ÷ 250 = $512. For weekly schedules, divide by the number of weeks instead.
Getting the divisor right means counting actual business days or payment periods in your term, excluding weekends and bank holidays. A “six-month” term might mean 125 to 130 business days depending on the calendar, and that difference changes your daily payment by enough to cause cash flow problems if you budget using the wrong number.
Daily payments pull smaller amounts but hit your account every business day, keeping your operating cash in constant flux. Weekly payments are larger per withdrawal but give you more predictable cash flow between pulls. Ask whether the lender offers both frequencies before signing; the payment schedule is sometimes negotiable even when the factor rate is not.
Early Repayment and What It Doesn’t Save You
With a traditional amortizing loan, paying ahead of schedule reduces total interest because interest accrues on the declining balance. Factor-rate financing works differently. The total cost is locked in at origination, so repaying early just compresses the same dollar amount into fewer payments. You finish faster, but you don’t pay less.
Some lenders do offer early payoff discounts, but these are negotiated exceptions rather than the standard. If early repayment savings matter to your business, ask for the discount terms in writing before signing. Refinancing into a new advance carries the same trap: most funders still require you to repay the full cost from the original agreement before rolling into a new one, which stacks costs quickly.