How to Calculate Factor Rate

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Factor Rate Calculator

Calculated Factor Rate:

function calculateFactorRate() { var funding = parseFloat(document.getElementById('fundingAmount').value); var repayment = parseFloat(document.getElementById('totalRepayment').value); var resultArea = document.getElementById('resultArea'); var factorResult = document.getElementById('factorResult'); var costOfCapital = document.getElementById('costOfCapital'); if (isNaN(funding) || isNaN(repayment) || funding <= 0) { alert("Please enter valid numbers. Funding amount must be greater than zero."); return; } var factorRate = repayment / funding; var totalCost = repayment – funding; factorResult.innerHTML = factorRate.toFixed(4); costOfCapital.innerHTML = "Total Cost of Financing: $" + totalCost.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); resultArea.style.display = "block"; }

Understanding Factor Rates: How to Calculate and Compare

A factor rate is a method of expressing the cost of a business loan or merchant cash advance (MCA). Unlike traditional interest rates which are expressed as an annual percentage (APR) and accrue over time on the remaining balance, a factor rate is a fixed decimal figure applied only to the original principal amount.

How to Calculate Factor Rate Manually

Calculating the factor rate is straightforward if you know the total amount you are required to pay back and the total amount of funding you received. The formula is:

Factor Rate = Total Repayment Amount / Original Funding Amount

Example Calculation

Suppose your business receives a cash advance of $50,000. The funding provider requires you to pay back a total of $65,000 over the term of the agreement.

  • Funding Amount: $50,000
  • Total Repayment: $65,000
  • Calculation: $65,000 รท $50,000 = 1.30

In this scenario, your factor rate is 1.30.

Factor Rate vs. Interest Rate

It is a common mistake to view a factor rate of 1.30 as a 30% interest rate. In reality, the "effective APR" is often much higher. This is because:

  1. No Compounding: Factor rates apply to the full original amount for the duration of the term, regardless of how much you have already paid back.
  2. Time Sensitivity: Because cash advances are often repaid quickly (daily or weekly), the speed of repayment significantly increases the effective APR compared to a traditional multi-year loan.
  3. Fixed Cost: In most cases, you cannot save money by paying off a factor-rate-based advance early, as the total cost is fixed from day one.

Why Do Lenders Use Factor Rates?

Factor rates are primarily used in high-risk lending or alternative financing, such as Merchant Cash Advances (MCA). They are popular in these industries because:

  • They provide a simple, upfront look at the total cost of capital.
  • They allow for fast underwriting and funding processes.
  • They are suited for businesses with high credit card sales but low traditional collateral.

When to Use This Calculator

Use the factor rate calculator when you are reviewing a funding offer that does not explicitly state an interest rate. By inputting the "buy rate" or the total payback amount, you can quickly determine the multiplier being used. This helps in comparing different offers side-by-side to ensure you are getting the most competitive terms for your business operations.

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