Business financing is priced differently than almost any other kind of borrowing, using a convention called a factor rate that looks deceptively simple but frequently leaves business owners with a badly distorted sense of what an offer actually costs. Understanding this gap can mean the difference between recognizing a genuinely fair offer and one that costs considerably more than it first appears to.
Why a Factor Rate Isn’t an Interest Rate
A factor rate is a multiplier, not a percentage that accrues over time. A 1.30 factor on $100,000 means a business repays $130,000 total, and that $30,000 cost is fixed on day one, regardless of how quickly the balance is repaid. This differs fundamentally from a traditional interest rate, which accrues specifically on whatever balance remains outstanding, meaning the true cost naturally declines as the balance falls throughout repayment.
A factor rate instead charges the full cost upfront, then collects that already-fixed amount in daily or weekly installments while the balance is already declining. Run through an actual payment schedule, a 1.30 factor repaid daily over twelve months works out to an estimated annual percentage rate closer to 55%, not the 30% figure a business owner might reasonably assume just from glancing at the factor rate itself.
Seeing the Real Number Before You Commit
Fundivi, a direct lender and hybrid funding platform, built a free tool specifically to close this gap. The cost calculator takes the exact terms of any real offer, product type, funding amount, factor rate, term length, and payment frequency, and calculates an estimated APR, total repayment, and total cost of capital, all worked out directly from the actual payment schedule rather than the factor rate alone.
Fundivi’s own published example makes the gap concrete: a $100,000 revenue-based financing offer at a 1.30 factor rate, repaid daily over twelve months, works out to an estimated 54.8% APR, a total repayment of $130,000, and daily payments of $515.87 across 252 business days. For comparison, a conventional term loan on the same amount and term at an estimated 12.99% APR would cost roughly $6,661 in interest, meaning the factor rate structure costs $23,339 more on an identical amount and timeline.
Why Term Length Is the Lever Most People Miss
One of the most counterintuitive details the calculator reveals is how dramatically term length affects the annualized cost, even though the actual dollar cost never changes. That same 1.30 factor still costs exactly $30,000 on $100,000 whether the term is six months or eighteen. What shifts considerably is the annualized rate: roughly 109% APR over six months, 55% over twelve months, and 37% over eighteen months on a daily schedule.
A shorter term is not, contrary to what many business owners assume, a cheaper deal. It’s a considerably more expensive one on an annualized basis, and it demands a larger share of weekly cash flow to service the same fixed dollar cost over a shorter window.
What the Calculator Doesn’t Include
Fundivi is clear that the estimate excludes origination fees, servicing fees, and any other charges a specific funder might add, all of which would push the real APR even higher. Every figure is an estimate built from the numbers entered, and actual terms ultimately depend on what a specific funder offers.
Why Factor Rate Pricing Confuses So Many Business Owners
Most business owners come to their first financing search with a mental model of borrowing shaped by mortgages, auto loans, and credit cards, all of which are priced using a traditional interest rate that accrues on a declining balance. Factor rate pricing breaks that mental model entirely, and lenders quoting a factor rate rarely go out of their way to explain the difference, since a 1.30 factor genuinely sounds, at first glance, like a considerably smaller number than a 55% annualized rate would.
This mismatch between how business financing is actually priced and how most borrowers instinctively think about cost has real consequences. A business owner comparing a factor rate offer against a traditional bank loan quoted in APR terms, without converting both to the same basis, is essentially comparing two entirely different units of measurement and drawing conclusions that may be badly wrong as a result.
The Same Deal, Three Different Numbers
Placed side by side, a single underlying deal can look genuinely different depending on how it’s described. Quoted simply as a factor rate, an offer might show as 1.30, with $30,000 in cost of capital. Annualized on the actual payment schedule, that same deal becomes roughly 54.8% APR, with the identical $30,000 cost of capital, just expressed against the calendar year rather than as a flat multiplier. A conventional term loan on the same amount and term, by contrast, might carry an estimated APR closer to 13%, costing considerably less in absolute dollars despite being repaid over the identical timeframe.
None of these three descriptions is technically inaccurate. They’re simply different lenses on the same underlying cost, and a business owner who only ever sees the first one, the raw factor rate, is missing the two comparisons that actually matter most when deciding whether a specific offer represents genuinely fair value.
How Payment Frequency Changes the Math Further
Beyond term length, payment frequency itself meaningfully affects how a factor rate translates into an annualized figure. A daily repayment schedule collects the same total cost in smaller, more frequent installments than a weekly or monthly schedule would, and because daily schedules are typically annualized against actual business days rather than calendar days, the resulting APR calculation reflects a genuinely different payment cadence than a business owner might initially assume from the factor rate and term length alone.
Understanding this interaction between term length and payment frequency, rather than focusing on the factor rate in isolation, is precisely what separates a genuinely informed comparison from one based on an incomplete picture, and it’s exactly the kind of nuance a simple factor rate quoted on its own can never fully communicate.
Frequently Asked Questions
Why Can’t I Just Compare Factor Rates Directly Between Two Offers?
Because term length and payment frequency both affect the true annualized cost dramatically, even when two offers show identical factor rates. A lower factor rate with a shorter term can genuinely cost more than a higher factor rate with a longer term once both are properly annualized.
Does The Calculator Work For Offers From Lenders Other Than Fundivi?
Yes. The tool is built to calculate the true cost of any factor rate offer, regardless of which lender issued it, using only the terms you enter.
Is The APR Shown By The Calculator The Exact Rate I’ll Pay?
It’s a close estimate based on the payment schedule you enter, but it excludes fees like origination or servicing charges that a specific funder might add, which would push the real cost slightly higher.
Why Does The Calculator Use 252 Days Instead Of 365 For Daily Schedules?
Because daily repayment schedules typically only debit on actual business days, and 252 reflects that real payment cadence more accurately than a calculation based on calendar days would.
Should I Use This Calculator Before Or After Receiving An Offer?
Both have value. Before receiving an offer, it helps you understand generally how factor rate pricing works. After receiving one, it converts that specific offer into a number you can genuinely compare against other financing options.
Getting Started
Business owners with an existing offer can enter its exact terms into the cost calculator directly. Those still exploring options can first check what they might qualify for using Fundivi’s self-underwriting tool, then see which specific product fits their need through the product matching calculator before ever comparing a real offer’s true cost. For a deeper look at how factor rate pricing works across different products, Fundivi’s resource library covers the details in plain language.
Disclaimer: This article is for general informational purposes only and does not constitute financial, legal, or lending advice. Calculations and examples are estimates and may not include origination fees, servicing fees, or other charges. Actual rates, repayment terms, and eligibility vary by provider and applicant. Review all financing documents carefully and consult a qualified professional before making a financial decision.
