Factor rate vs. APR: why 1.20 does not mean 20% interest

What a factor shows

A simple factor is commonly multiplied by the amount provided to produce a purchased amount or total repayment before other charges. An $80,000 amount at a 1.20 factor produces $96,000 before additional fees.

The factor alone does not incorporate how quickly payments occur. Paying $16,000 above principal over six months is economically different from paying the same amount over eighteen months.

What APR adds

APR annualizes financing cost while considering time and payment timing under the applicable calculation. It can be useful for comparing credit products, but not every commercial financing structure is disclosed or legally treated the same way.

Do not invent an APR by subtracting one from the factor. Use the actual payment schedule and all required charges in an appropriate calculation.

The comparison that works in every conversation

Ask for cash delivered, all fees, total repayment or purchased amount, expected payment amount, frequency, number of payments or estimated duration, and payoff or reconciliation treatment.

Then model the cash flow on the dates payments leave the account. The business experiences a debit schedule, not a marketing label.

Red flags in the explanation

Pause if the representative will not provide a written dollar example, calls a factor an interest rate, avoids total repayment, says prepayment automatically saves all future cost, or pressures the business to sign before reviewing the agreement.