APR (annual percentage rate) and factor rate look like they describe the same thing. They don't. APR annualizes the cost of borrowing across a defined period and is what consumer-protection regulations like Regulation Z require for most consumer loans. Factor rate is a simple multiplier with no time component. Comparing the two requires conversion math that most borrowers never run.
What each number means
APR: the annualized cost of a loan, expressed as a percentage. A 12% APR loan with monthly amortization costs about 1% per month on the outstanding balance. APR allows direct comparison across loans of different terms.
Factor rate: a multiplier applied to the principal to determine total payback. A $50,000 advance at a 1.30 factor means total payback is $65,000 — regardless of how long it takes.
Why factor-rate alone is misleading
A 1.30 factor advance paid back over 6 months has a vastly higher annualized cost than the same factor paid back over 18 months — even though the dollar cost is identical. Because the dollar cost is fixed but the time isn't, only annualization makes meaningful comparison possible.
Quick conversion math
The simple (over-)approximation: estimated APR ≈ ((factor rate − 1) ÷ expected months to repay) × 12. For a 1.30 factor paid in 12 months: (0.30 ÷ 12) × 12 = 30% — but this ignores the daily/weekly remit that pulls payback toward the front of the period, which inflates the true APR.
A more accurate calculation uses an IRR or amortization model with the actual remit schedule. Several free APR calculators for short-term business loans exist; CFPB's small-business publications also walk through the math.
How to ask for it
Ask any lender quoting a factor rate to also provide the APR-equivalent in writing under their assumed payback timeline. If they refuse, the headline cost is almost certainly higher than it appears.
Sources
Editorial note: This article is general information about how small-business lending products work. It is not financial, legal, or tax advice for any specific borrower. Loan terms, eligibility, and rates vary by lender, borrower profile, and current market conditions, and the specific facts of your business will determine which products and structures actually fit. Consult a CPA, attorney, or SBA-approved lender before making decisions that affect your business.