APR vs factor rate: how to compare business finance costs

2 min read

APRTime-aware annual percentage

FactorFlat multiplier, e.g. 1.2

TranslateConvert before comparing

What each number actually means

An APR tells you the yearly cost of borrowing as a percentage, including compulsory fees, and it accounts for how long you hold the money. A factor rate is a single multiplier applied to the amount borrowed: 1.15 means you repay 115% of the sum, whatever the term. Because the factor ignores time, repaying faster does not reduce it — a short, fast repayment at a factor of 1.2 can equate to an eye-watering APR.

Converting a factor rate to an APR

The rough conversion is: total cost of credit ÷ amount borrowed, then annualised over the term. Borrow £30,000 at a factor of 1.18 repaid over 9 months and you pay £5,400 in charges — but because you only hold the money for three quarters of a year, the annualised cost is well above 18%. The shorter the term, the higher the effective APR for the same factor.

When a factor-rate product still makes sense

A merchant cash advance or short bridge quoted on a factor rate can be the right call when speed and flexible repayment matter more than the lowest headline cost — for example, buying stock ahead of a proven sales spike. The key is to price it honestly against a term loan in the same units before deciding.

Compare like for like

The safe rule: convert everything to total repayable in pounds, and to APR where you can. A £2,000 arrangement fee turns a tidy-looking rate into a worse deal; a factor rate on a fast repayment turns a modest multiplier into a high APR. Run both through the true cost of borrowing calculator.

Where Credicorp sits

Credicorp lends to your company, not to you personally, and takes no personal guarantee. See indicative terms on business loans, or apply online in minutes.

Credicorp finance is quoted transparently so you can see the total repayable up front. Read how loan interest is calculated next.

Frequently asked questions

Is a factor rate always more expensive than APR?

Not always, but a factor rate almost always looks cheaper than it is, because it hides the effect of time. On a short term the same factor can equate to a very high APR.

Can I convert a factor rate into an APR exactly?

You can get a close estimate, but the exact APR depends on the repayment schedule and any fees. Ask the lender for the total repayable and the term, then annualise.

Why do lenders use factor rates at all?

They are simple to quote and suit products with flexible or turnover-linked repayment, where a fixed term does not apply. That simplicity is also why they can obscure the true cost.