What is a factor rate?
A factor rate is a fixed multiplier some business lenders use instead of an interest rate, common on short term fixed fee loans and merchant cash advances in Australia. Borrow $50,000 at a factor rate of 1.25 and you owe $62,500. That figure is locked in on day one and is repaid in equal daily or weekly instalments over the term.
Factor rates look small: 1.15, 1.25, 1.40. The problem is that they are not comparable to an interest rate, and the difference is not minor. It is roughly double.
Why a factor rate hides the true cost
An interest rate accrues on your outstanding balance. As you repay a normal loan, the balance falls and so does the interest. A factor rate charges the full fixed fee no matter what: repayments start immediately, so on average you only have use of about half the money, yet you pay the full fee on all of it.
Total repayable = amount x factor rate
Simple annual rate = (factor - 1) / term in years
True APR equivalent = the rate that makes your payment stream equal the advance (solved by this calculator)
That is why a 1.25 factor rate on a 6 month term, which sounds like 25%, is a simple rate of 50% p.a. and a true APR equivalent of roughly 90%.
Factor rate to APR conversion table
APR equivalents below assume equal weekly repayments over the full term, no additional fees. Figures are rounded.
| Factor rate | 6 month term | 12 month term |
|---|---|---|
| 1.10 | 37% APR | 19% APR |
| 1.15 | 55% APR | 28% APR |
| 1.20 | 73% APR | 37% APR |
| 1.25 | 90% APR | 46% APR |
| 1.30 | 107% APR | 54% APR |
| 1.40 | 139% APR | 70% APR |
Two things stand out. First, the shorter the term, the higher the true cost of the same factor. Second, even the sharpest factor rates convert to APRs well above a typical unsecured business overdraft at 14.55% to 25% p.a.
Worked example: $50,000 at a 1.25 factor over 6 months
- Total repayable: $62,500 ($50,000 x 1.25)
- Cost of finance: $12,500, fixed on day one
- Weekly repayment: about $2,404 for 26 weeks
- Simple annual rate: 50% p.a.
- True APR equivalent: about 90%
The same $50,000 on an amortising loan at 18% p.a. over 6 months costs about $2,650 in interest. The factor loan costs $12,500 for the same money over the same period.
When a factor rate loan can still make sense
Fixed fee loans settle fast, accept tougher credit profiles, and the repayment is predictable. For a genuinely short bridge, buying discounted stock, covering a tax deadline, unlocking a contract, the maths can work if the profit clearly exceeds the fixed fee. The mistake is using a 90% APR product for ongoing working capital when a revolving business overdraft does the same job for a fraction of the cost.
One more trap: with most factor rate contracts, repaying early does not reduce the fee, you simply give the money back sooner. Some lenders offer early payout discounts, but they must be in the contract. Ask before you sign.