Factor Rate, APR, and What the Client Is Actually Paying

A business owner is looking at two offers. One is a term loan at 28% APR. The other is $100,000 of revenue-based financing at a 1.30 factor rate, repaid daily over six months.

Most owners read the second one as roughly 30% and assume it is the cheaper of the two. It is not close. Depending on the term, that 1.30 can work out to an annualized cost somewhere north of 90%.

The gap between those two numbers is where most of the distrust in this industry comes from. It is also, as of the last two years, a compliance question rather than a matter of style.

Why a factor rate is not a rate

A factor rate is a multiplier on the amount advanced. Advance $100,000 at 1.30 and the business repays $130,000. The $30,000 is fixed the moment the deal funds. It does not accrue, it does not reduce as the balance is paid down, and paying early usually does not shrink it unless the agreement specifically provides for that.

Interest works the other way. A 28% APR is a rate applied over time to whatever balance is outstanding. As the balance falls, the interest charge falls with it.

That single difference is the whole thing. With a factor rate, the cost is fixed and the term is the variable. Repay $130,000 over twelve months and the annualized cost is around 30%, which is where the intuition comes from. Repay the same $130,000 over six months, which is far more typical, and you have paid the same $30,000 for half the time. The annualized cost roughly doubles.

Shorten the term further and it climbs again. This is why a "cheap" factor rate on a short term is often the most expensive money in the room, and why a longer term at the same factor rate is genuinely better for the client rather than just slower.

The daily payment does its own damage

Most sales-based financing repays daily or weekly against deposits. That structure compresses the effective term further, because the business never holds the full advance for anything like the nominal period.

It also affects the client's cash position in a way the headline numbers do not show. An owner comparing a monthly payment to a daily debit is comparing two different things. The right question is not "what is the payment," it is "what does Friday look like when payroll and the debit land in the same week."

An operator who raises that before the client discovers it keeps the client. One who does not, gets the call in month two.

The math you should be able to do out loud

You do not need a spreadsheet to give a useful estimate.

Take the total cost, divide it by the amount advanced, and that gives you the cost as a percentage of the advance. Then account for the term: divide by the number of months and multiply by twelve to get a rough annualized figure. Because the balance is amortizing rather than sitting there for the whole period, the true APR runs meaningfully higher than that rough figure — often close to double for a daily-pay deal.

So the $100,000 at 1.30 over six months: $30,000 of cost on $100,000 is 30% over half a year, so roughly 60% annualized as a floor, and the real APR lands higher once amortization is accounted for.

The point of doing it out loud is not precision. It is that the client hears the real order of magnitude from you rather than from someone else later.

This is now the law in California, and the direction everywhere else

California's SB 362, effective in 2025, requires commercial financing pricing to be expressed as an annual percentage rate, and restricts using words like "interest" or "rate" in a way that misleads. If you state a charge or a financing amount to a California prospect, the APR goes with it. California's disclosure law covers financing of $500,000 or less.

Nine other states now require commercial financing disclosures in some form: Connecticut, Florida, Georgia, Kansas, Missouri, New York, Texas, Utah and Virginia. The thresholds and the covered products differ, and I went through them in The Commercial Financing Disclosure Laws, State by State.

What matters here is the consequence for how you sell. The disclosure arrives whether or not you have prepared the client for it. If your positioning rested on the factor rate sounding small, the disclosure undoes your pitch in front of the client, at the worst possible moment, and you have no answer ready.

What good brokers do instead

Lead with the total dollars. "You will repay $130,000 over about six months, roughly $1,000 a business day." Business owners think in dollars and cash flow, not in rates. The dollar figure is both more honest and more persuasive, because it is the number they can actually test against their own bank account.

Name the annualized cost before they ask. Saying "annualized this is expensive money, and here is why it can still be the right call" is a stronger position than hoping it does not come up. It also makes you the person who told them the truth, which is the entire basis of a referral.

Tie the cost to a use of funds that outruns it. Expensive capital is rational when it buys something that returns more than it costs, and irrational when it fills a hole. Inventory for a signed contract, materials for a job already awarded, payroll ahead of a receivable that is coming: those justify the cost. "Cash flow" does not.

Say no out loud sometimes. The deals that end badly are the ones where the owner could not carry the payment and everyone involved could see it. Walking away from one of those costs you a commission and saves you the client.

Why this is an advantage, not a burden

The APR rules are treated as a compliance headache by most of the industry. They are actually the best thing to happen to the honest end of it in years.

If the cost of capital is going to be stated plainly in every offer regardless, then the only durable way to compete is to be the person who explains it, puts it next to the alternatives, and tells the client when the answer is no. That is a harder business to start and a much harder one to take away from you.

The brokers who spent a decade competing on how the number sounded are going to have a difficult couple of years. Everyone else just got handed a level field.

Current as of September 2026. Disclosure rules vary by state and change frequently. General information for operators, not legal or financial advice.