Business Financing
Factor rates, discount rates and daily repayments — how to convert every offer into one comparable number.
Everything converts to APR
Business finance is quoted in deliberately incomparable units: interest rates, factor rates, discount rates, daily holdbacks. The only way to compare them is to convert each to an annualised cost including fees, measured against the cash you actually receive rather than the amount nominally funded.
Factor rates are not interest rates
A merchant cash advance quoted at 1.3 means you repay one hundred and thirty percent of the advance, regardless of speed. Because the fee is fixed while the balance shrinks, repaying faster raises the effective annual rate rather than lowering it. Six-month advances routinely annualise above sixty percent.
Invoice factoring in true terms
A two percent discount for thirty days sounds like a fee. Annualised against the advance actually received, it lands in the twenties. Factoring buys cash flow, not cheap money, and it is worth what it costs only when the alternative is turning down work or missing payroll.
Recourse and where the risk sits
Under a recourse agreement you remain liable if your customer does not pay. Non-recourse moves that credit risk to the factor and costs more for exactly that reason. Reading which one you signed matters most at the moment a customer fails, which is the worst time to discover it.
Fees that live outside the rate
Origination reduces the cash you receive while you pay interest on the full amount. Maintenance, draw and minimum-volume fees on a credit line are easy to overlook and materially change the cost. Termination clauses in factoring agreements are frequently the most expensive term in the document.
Matching the instrument to the need
A revolving line suits genuinely temporary gaps and is expensive if permanently drawn. A term loan suits a defined investment with a defined payback. Factoring suits a business whose problem is timing rather than profitability. Using the wrong instrument is more costly than paying a slightly higher rate on the right one.
Common questions
Is factoring debt?
Technically you are selling a receivable, so it often does not appear as debt. The cost behaves like interest and should be compared as such.
Why do lenders quote daily repayments?
Because a small daily number sounds manageable. Multiply it out and convert to APR before comparing anything.