Every time you apply for financing or to borrow money, you’ll notice an associated interest rate or factor rate. But what are the differences between
Every time you apply for financing or to borrow money, you’ll notice an associated interest rate or factor rate. But what are the differences between these two rates and why does it matter for business owners? These numbers will look wildly different, but at their most basic level, factor rates and interest rates are both numerical signifiers of how much you’re going to pay in order to borrow money.
Maybe the best way to understand what makes these rate signifiers different is to understand them each individually. We’re going to break it all down for you and explain what makes factor rates and interest rates different and why every business owner should care.
What are Factor Rates?
Factor rates are most commonly used in the process of acquiring short-term financing like a merchant cash advance, also known as a business cash advance. In a merchant cash advance, a financial institution gives a business money up-front which is repaid automatically by deducting a certain amount of money from the business’s future sales, like incoming credit or debit card payments, until the advance is repaid.
And how much is repaid? That’s where factor rates come into play. Expressed as a decimal, usually somewhere between 1.1 and 1.5, a factor rate is multiplied by the principal amount, which results in the total repayment amount. Read More....