Factor Rate vs. APR: What’s The Difference?

It’s unfortunate, but half the battle to finding a small business loan that works for your company is down to simply understanding the nature of the loan you’re applying for. That’s because while certain borrowing options appear similar on the surface –– loans and cash advances for instance –– they actually function quite differently. As such, figuring out what terms like APR and factor rate mean to your bottom line is essential. The good news is, we’re going to clear up the confusion. Here is the definitive difference between factor rate and APR:

Cash Advances and Factor Rates

First of all, factor rates are typically associated with cash advances. And cash advances differ from loans in regard to how lenders collect debt. Rather than charging an interest rate, lenders will often apply a factor rate instead. Note that factor rates are expressed as decimals ranging from 1.1 to 1.5. However, you can still think of a factor rate in similar terms to interest. That’s because if you multiply your factor rate by the amount of capital you borrowed, you can arrive at the sum you’ll need to pay back your lender. So if you borrow 10,000 with a 1.3 factor rate, you’ll owe 13,000 by the end of the payment period.

Loans and APR

Loans operate differently from cash advances in that you don’t continue to pay interest on the principal (or original) borrowed sum as the loan progresses. Rather, you’ll pay decreasing amounts as you pay back the loan. And you can choose to pay back interest ahead of time if you so choose with a small business loan. APR enters the equation in regard to all of the miscellaneous, unforeseen, tangential costs of a loan. In layman’s terms, the APR is the rate you’ll actually have to pay on a loan at the end of the day. So if your given rate is five percent, your APR might be 5.5 or 5.8 percent –– depending on other cost factors.

What it All Means

APR is a metric you should certainly pay attention to when applying for a small business loan –– because it’ll tell you the exact amount of cash you owe on a given sum. In the same breath, you also shouldn’t think of a factor rate exactly how you consider a loan. While similar, they are distinct, and you’ll need to take that into account before you apply for a cash advance. The good news is, you can work to lower the factor rate next time you apply by building a healthy credit score and establishing a thriving business.

 

Talk to the Pros

If you’re still unsure which route is best for your small business to take to secure necessary funding then relax. You can contact the National Business Capital team today. We want to see you succeed and will help you identify the perfect program for your company. And for more information on how to score finances when the banks say no, download our free eBook here:

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About the Author, Megan Capobianco
Megan Capobianco is the Marketing Manager at National Business Capital. Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.