Interest Rates and Factor Rates Explained
Interest rates and factor rates are loan rates that lenders charge you on your financing. Because loan rates ultimately determine the total cost of your business loan, you should be able to distinguish between them.
You’re probably already familiar with interest rates, which accompany many business, home, and equipment loans. The interest – given as a percentage – is the amount the lender charges you for your loan. Interest rates are calculated many times over the life of the loan, and are based on depreciating capital as you make your monthly payments.
Lenders may also quote commercial loan rates through factor rates, which are particularly common when it comes to short-term loans or business cash advances (also known as merchant cash advances).
While a factor rate can be given as a percentage, it is more commonly expressed as a decimal figure, and typically ranges from 1.1 to 1.5. The rate you are given is based on various factors, including what industry you’re in and the stability of your business, which is determined by how long you’ve been in business, your average monthly sales, and so on.
If you want to find out what your factor rate is, first, figure out the total cost of your business loan by multiplying the loan amount by the factor rate. Say you’re getting an advance of $100,000 at a factor rate of 1.15 for a 12-month term. You’ll need to repay $115,000. You can calculate the factor rate by dividing the financing cost by the loan amount.
One very important distinction to keep in mind is that with factor rates, interest due is calculated and charged to the principal at loan origination, which means you end up paying all the interest up front in each scheduled payment. So while the principal on your short-term loan may be smaller compared to an annual percentage rate loan, for example, your interest rate is very likely higher since it does not accrue on depreciating capital. Along the same lines, paying off your short-term loan early won’t save you any interest charges.
That said, short-term financing options that carry a business loan factor rate might still be your best option when you need to quickly increase your cash flow or working capital, nab a great business opportunity, or meet myriad other short-term business needs.
Other Useful Resources By Plousio
- What is a business loan?
- Credit Score Explained
- Why borrow money to purchase business equipment?
- Business Loan Underwriting Explained
- Interest Rates & Factor Rates Explained
- Why business loans get declined
- Business bank account requirements for loans
- Preparing for a business loan
- Getting approved for a business loan
- How to qualify for a business line of credit?
How Does Plousio Work?
Plousio makes it easy to find a great small business loan with the most competitive rates. Simply answer a few questions, select a lender and fill out our account creation form and you’ll start receiving new offers right away! With 3 easy steps, you can get your death care business funded!
Step #1: Apply online or call 1-508-848-0534
Step #2: Receive the most competitive offers
Step #3: Get funded within 24 ~ 48 hours
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If you need help with determining your funding eligibility or preparing application and documents, please contact our funding adviser today. Plousio funding advisers pride themselves in transparency and non-aggressive communication practices. They are not here to make sales quotas, instead, focus on helping you every step along the way of your funding process. In the unlikely event, you do not think that Plousio is the right solution for you, just let us know – No problem! We promise we wont be calling you 5 times a day like some other companies do.