Last reviewed: August 2026. Lenders quote pricing in different formats; always confirm the total repayment figure in your contract before you sign.
A factor rate calculates the total repayment by multiplying the borrowed amount by a fixed number. A $100,000 loan at a 1.20 factor rate has a total repayment of $120,000. This is not the same as a 20% annual interest rate, because an interest-charging loan applies interest to a balance that falls with every repayment. Converted honestly, a 1.20 factor rate on a 12-month loan works out at an equivalent annual interest rate of roughly 35%.
The short version
- A factor rate multiplies the amount borrowed by a fixed number: $100,000 at 1.20 means $120,000 to repay.
- Interest is charged on the outstanding balance, which falls as you repay. A factor-rate cost is fixed on the full original amount.
- A 1.20 factor rate over 12 months is equivalent to an annual interest rate of roughly 35%, not 20%.
- Factor-rate costs generally do not reduce if you repay early. Interest costs do.
- Compare loans on total dollars repaid over the same term, never on the headline number alone.
What is a factor rate?
A factor rate is a decimal multiplier, usually somewhere between 1.1 and 1.5, that sets the total cost of a loan up front. Multiply the amount you borrow by the factor rate and you have the total you will repay. Borrow $50,000 at a 1.15 factor rate and you repay $57,500. The $7,500 cost is locked in the moment you sign, regardless of how the repayments are spread across the term.
Factor rates are most common on short-term unsecured business loans and merchant cash advances, typically with terms of 3 to 18 months and weekly or even daily repayments.
What is an interest rate?
An interest rate charges a percentage of the outstanding balance for as long as you owe it. On a standard amortising business loan, each repayment covers the interest accrued that period plus a slice of the principal. The balance falls, so the next period's interest is calculated on a smaller amount, and the interest portion of each repayment shrinks as the loan runs down.
That declining-balance mechanic is exactly what a factor rate does not have, and it is the reason the two numbers can never be compared digit for digit.
Worked example: $100,000 over 12 months
Same loan size, same 12-month term, same headline number of "20":
- Factor rate 1.20: total repayment $120,000. Cost of funds: $20,000.
- Interest rate 20% p.a. (amortising monthly): repayments of about $9,263 a month, total repayment about $111,160. Cost of funds: about $11,160.
The factor-rate loan costs about $8,800 more, nearly 80% more in dollar terms, despite the identical-looking headline number. That gap is the whole factor rate vs interest rate problem in a single example.
Why a 1.20 factor rate does not equal 20% interest
On an amortising loan you hand money back with every repayment, so across a 12-month term your average outstanding balance is only a little over half the original amount. With a factor rate you pay the full fixed cost on the full original amount anyway.
Paying $20,000 to use an average balance of roughly $54,000 for a year is an annualised cost in the mid-30s in percentage terms. That is why the honest conversion of a 1.20 factor rate over 12 months lands around 35% per annum. Shorten the term and it climbs further: the same 1.20 factor over 6 months is equivalent to an annual rate above 60%, because you are paying the same $20,000 for half the time.
Factor rate vs simple interest vs APR
| Pricing method | Cost is charged on | Cost on $100,000 over 12 months at "20" | Repay early and save? |
|---|---|---|---|
| Factor rate 1.20 | The original amount, fixed at settlement | $20,000 | Usually no |
| Simple (flat) interest 20% | The original amount for the whole term | $20,000 | Sometimes, check the contract |
| Interest 20% p.a. on the balance (APR style) | The outstanding balance, which falls as you repay | About $11,160 | Yes |
A factor rate is essentially flat interest expressed as a multiplier: both charge on the original balance for the whole term. Only the declining-balance method behaves the way most people intuitively expect a "rate" to behave. For the maths on annualising any quote so products can be compared side by side, see effective annual rates on business loans.
What happens when repayments are weekly?
Most factor-rate lenders collect weekly or daily rather than monthly. On a $100,000 loan at 1.20 over 12 months, weekly collection means 52 debits of about $2,308.
Faster collection means you hold the borrowed money for even less time on average, so the equivalent annual rate creeps higher again, to roughly 37% for the weekly version of that loan. Daily repayments push it higher still. There is also a cash-flow reality to plan for: the debits arrive every week whether or not your customers have paid you.
Worked examples at three loan sizes
All at a 1.20 factor rate over 12 months:
| Amount borrowed | Total repayment | Fixed cost | Monthly repayment (12) | Weekly repayment (52) |
|---|---|---|---|---|
| $25,000 | $30,000 | $5,000 | $2,500 | About $577 |
| $50,000 | $60,000 | $10,000 | $5,000 | About $1,154 |
| $100,000 | $120,000 | $20,000 | $10,000 | About $2,308 |
Every row works out at an equivalent annual interest rate of roughly 35%. The factor rate scales the dollars, not the percentage.
Questions to ask before accepting a factor-rate loan
- What is the total dollar repayment, in writing? This one number cuts through every quoting format.
- What is the term and repayment frequency? The same factor rate over a shorter term is a much higher annualised cost.
- Is there any discount for early repayment? Usually not, but some lenders offer one. If you expect to repay early, this matters more than the rate itself.
- What fees sit on top of the factor rate? Establishment fees, direct debit fees and dishonour fees all add to the true cost.
- What is the equivalent annual rate? A lender or broker who will not answer this is a warning sign in itself. See our guide to business loan red flags and traps.
A factor rate is not a trick in itself. Quoting "1.2" to someone who hears "20%" is. Any lender or broker unwilling to put the total dollar repayment and an equivalent annual rate in front of you is telling you something about how the product compares.
When factor-rate lending may still make sense
Factor-rate loans exist because they are fast, unsecured and certain: the cost is fixed and known to the dollar before you sign, approval can be quick, and repayments are predictable. For a short-lived opportunity with a clear return, that can still be a rational trade.
The test is simple. Work out the fixed dollar cost, then ask whether the opportunity reliably returns more than that within the term, and whether any cheaper facility could be in place within the time you actually have. If a stock purchase at supplier discount clears margin comfortably above the fixed cost, expensive money can still be profitable money. If the loan is patching an ongoing shortfall rather than funding a defined opportunity, a factor-rate product is usually the wrong tool.
Next steps
Compare the total dollar cost, not just the advertised rate. If a quote only shows a factor rate, ask for the total repayment in dollars and the equivalent annual rate before you sign, and put every offer on the same 12-month, total-dollars footing before choosing.
Frequently asked questions
Is a factor rate the same as an interest rate?
No. A factor rate is a fixed multiplier applied once to the amount borrowed, so the total cost is set on day one. An interest rate is charged on the outstanding balance over time, which falls as you repay. Because of that, the equivalent annual interest rate of a factor-rate loan is usually far higher than the factor number suggests.
What does a 1.20 factor rate mean?
Multiply the amount borrowed by 1.20 to get the total repayment. Borrow $50,000 and you repay $60,000; borrow $100,000 and you repay $120,000. The extra 20% of the original amount is the fixed cost of the loan.
What does a 1.15 factor rate mean?
The same calculation with a smaller multiplier: borrow $50,000 at a 1.15 factor rate and you repay $57,500, a fixed cost of $7,500. Over a 12-month term that is equivalent to an annual interest rate in the mid-to-high 20s, not 15%.
Is a 1.2 factor rate expensive?
Over 12 months, a 1.2 factor rate is equivalent to an annual interest rate of roughly 35%, and over 6 months it exceeds 60%. That is expensive next to a secured bank loan, though it is typical pricing for fast unsecured short-term lending. Whether it is worth paying depends on whether the opportunity it funds returns more than the fixed dollar cost within the term.
Can a factor rate be converted into an annual percentage rate?
Yes, approximately. Because repayments run down the balance, the equivalent annual rate is close to double the simple percentage implied by the factor over one year, adjusted for the term. A 1.20 factor over 12 months converts to roughly 35% per annum; halve the term and the rate roughly doubles. Our guide to effective annual rates walks through the calculation.
Are factor-rate costs reduced if I repay early?
Usually not. The total repayment is fixed at settlement, so repaying early normally saves nothing; you simply hand over the same total sooner. Some lenders offer an early-repayment discount, but it must be in the contract. This is the opposite of an interest-bearing loan, where early repayment genuinely reduces the interest you pay.
Is interest charged on the original balance or the outstanding balance?
It depends on the product. Amortising loans charge interest on the outstanding balance, which falls as you repay. Factor-rate and flat-rate products fix the cost against the original balance for the whole term, which is why their equivalent annual rate is so much higher than the headline number.
Why do some business lenders quote factor rates?
Partly because the products genuinely work that way: a fixed total cost collected in equal instalments is simple to administer alongside daily or weekly debits. And partly because a factor of 1.2 looks smaller than an equivalent annual rate of about 35%. The defence is always the same: ask for the total dollar repayment and compare offers on that figure. Before comparing anything, it helps to be clear on what you actually need the loan for.
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