A factor rate multiplies the advance amount to calculate total remittances. APR expresses financing cost on an annual basis while accounting for the amount and timing of funding, payments, and relevant fees. A 1.30 factor is not the same as a 30% APR.
To compare financing offers, calculate both the dollar cost and the cash-flow-based annualized rate. A shortcut that divides cost by the advance and annualizes it can be useful, but it is not a payment-timing-aware APR.
Step 1: Calculate total remittances
For a factor-priced advance, multiply the gross advance by the factor rate. A $50,000 advance at 1.30 produces $65,000 of total remittances: $50,000 × 1.30. Before additional fees, the difference is $15,000.
| Sample factor | Gross advance | Total remittances | Difference before fees |
|---|---|---|---|
| 1.15 | $50,000 | $57,500 | $7,500 |
| 1.25 | $50,000 | $62,500 | $12,500 |
| 1.30 | $50,000 | $65,000 | $15,000 |
| 1.40 | $50,000 | $70,000 | $20,000 |
These are calculation scenarios, not market averages or TurboCap rate tiers. The agreement determines which charges are included and whether early payoff changes the amount due.
Step 2: Identify net proceeds and fees
If a $1,500 fee is withheld from the $50,000 advance, net proceeds are $48,500. If remittances remain $65,000, the difference between total remittances and cash received is $16,500. Do not add the same withheld fee again when comparing those two amounts.
If a fee is paid separately, add that cash outflow at its actual date. If part of the funding pays off another agreement, show the payoff separately from new working capital: financing used to retire a prior balance has a different purpose from cash available for payroll or inventory.
Step 3: Understand the simple annualized shortcut
The simple annualized cost ratio is: dollar cost ÷ net proceeds × 365 ÷ estimated calendar days × 100.
With no fees, $15,000 ÷ $50,000 × 365 ÷ 180 × 100 equals 60.83%. Over 365 days, the same shortcut gives 30.00%. These figures spread the dollar cost over a year; they do not reflect a declining outstanding balance as payments are made. Label them “simple annualized cost,” rather than APR.
Step 4: Use the actual cash-flow schedule
For a payment-timing-aware comparison, find a discount rate that makes the present value of scheduled remittances equal to net proceeds. For equal monthly payments, solve:
Net proceeds = sum of [payment at month t ÷ (1 + monthly rate)^t].
A hypothetical $50,000 advance with six equal end-of-month remittances totaling $65,000 has a monthly internal rate of approximately 8.05%. Multiplying the monthly rate by 12 gives an illustrative nominal annualized rate of approximately 96.64%. Compounding that monthly rate over 12 months gives an effective annual rate of approximately 153.32%.
The simple 60.83% figure, the nominal annualized rate, and the effective annual rate answer different questions. They must not be used interchangeably. The six-payment illustration assumes monthly periods, no fees, and no irregular payments; it is not a statutory disclosure calculation for a daily-remittance MCA.
Daily and weekly schedules need their own model
Daily payments cannot be accurately converted by adding a universal 10% or 15% adjustment. Use each payment’s date and amount, including business-day schedules, holidays, fees, and any final irregular remittance. An XIRR-style calculation can produce an effective annual cash-flow rate for dated payments; that result is not automatically the legally required APR.
For sales-based financing, the duration may depend on future sales. An estimate must state its sales assumptions, expected remittance pattern, and fee treatment. Faster collections can raise the annualized rate without increasing the total purchased amount. Slower collections can lower the annualized rate while leaving the dollar obligation unchanged.
Why revenue holdback differs from factor rate
The factor determines the purchased amount or total remittances under the offer. A holdback percentage determines how much qualifying sales volume goes toward that amount. Neither number substitutes for the other.
For example, a 12% card-sales holdback on $5,000 of qualifying settled sales produces a $600 remittance. The actual deposit also depends on processor fees and other adjustments. A fixed $600 ACH debit is different: it does not automatically decrease merely because that day’s sales decline. Read the reconciliation procedure.
Check early payoff and disclosures
Do not assume early payoff saves the unpaid financing charge. Ask for the payoff calculation and any written discount schedule. A full fixed purchased amount, a prorated discount, and an amortizing interest loan have different payoff economics.
Commercial financing disclosure requirements vary by jurisdiction and transaction. New York’s sales-based financing disclosure framework includes an estimated APR and specified assumptions. Use the provider’s applicable written disclosure for the offer; this educational worksheet does not replace it.
A practical comparison checklist
Record gross funding, net proceeds, total remittances, all fees, payment dates, expected duration, and payoff terms. Then stress-test the operating cash left after payments. The lower factor offer can still be harder to carry if its remittances are collected much faster.
Frequently asked questions
- Is a 1.30 factor a 30% interest rate?
- No. It produces remittances equal to 130% of the gross advance before other charges. An annual rate also depends on payment timing and fees.
- Can I convert a factor rate to APR with one formula?
- Not from the factor alone. You need proceeds, fees, and a payment schedule or stated sales-based assumptions. A simple annualization shortcut is not a full APR calculation.
- Does a shorter collection period make an advance more expensive?
- It can increase the annualized cost and daily cash pressure even when total dollar remittances stay the same.
- Is effective annual rate the same as APR?
- No. Effective annual rate compounds a periodic rate over a year. Applicable APR rules specify their own methodology, assumptions, and fee treatment.
- Will early payoff reduce the purchased amount?
- Only if the agreement or a written payoff offer provides a reduction. Request the dollar payoff amount before assuming savings.
Note: Numerical examples, financing scenarios, and underwriting thresholds in this article are illustrative and provided for educational purposes; they are not confirmed TurboCap policies or offers. Actual terms, requirements, and outcomes vary by provider and applicant.
Considering business financing? Apply directly with TurboCap for a review of your circumstances.