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What is a Factor Rate?

When your small business needs a short-term financing solution to boost cash flow or generate working capital quickly, you might turn to a merchant cash advance, sometimes called a business cash advance. A merchant cash advance is a small business loan alternative that is paid back in exchange for a share of your daily credit card sales. Comparing the cost of this funding form to other solutions such as small business loans or lines of credit, you might come up against the unfamiliar term – Factor rate.

Merchant cash advance providers measure their fees with a factor rate

A factor rate is expressed not in percentages, unlike loan’s interest rates. Usually, factor rates vary from about 1.1 to 1.5, depending on the industry, years in business, credit score, and the average monthly credit card sales.

How to calculate a factor rate?

In other words, a factor rate determines the total amount you will need to pay back. How? Multiply the factor rate by the amount borrowed. So, if you are getting an advance of $100,000 at a factor rate of 1.3 for a 12-month term, the total amount you’ll need to repay is $130,000 ($100,000 x 1.3 = $130,000). Knowing you’re paying $30,000 for this $100,000, at first glance, you may think you’re simply paying a 30% interest rate for the advance.

However, when small business loans are priced at 30% interest rate the total payback amount would be approximately $117,000–a difference of $13,000! The 1.3 factor rate is actually equivalent to a 52% APR, not the 30% one might expect.

As you see, a factor rate is totally different from an interest rate in that a factor rate doesn’t take time into consideration, whereas an interest rate is typically considered in the timeframe. Rather than having a fixed monthly payment, the amount you pay per day varies according to your cash flow, meaning you pay less in slower days, and can pay back the money quickly if your business does well.

Reasons to Use a Merchant Cash Advance

Despite higher cost of this small business loan alternative and its short payback periods, business cash advances have defined benefits for small and medium size companies:

  • Higher approval rates.
  • Cash is deposited into account within hours.
  • Poor credit score is not an issue.
  • There are no fixed payments and no due date.

If you still have some questions contact our specialists at 212.865.3863 or visit our website!

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