Debt · 6 min
A factor rate is not an interest rate, and the difference is the whole story. Here is how to work out the real cost of the money leaving your account every morning.
An advance is not a loan. Legally it is a purchase of your future receivables, and that distinction is why it is priced the way it is, why the payment comes out daily, and why the number you were quoted looks nothing like an interest rate.
You were probably quoted a factor rate. Take $100,000 at a factor of 1.35. You do not pay 35% interest. You owe $135,000 in total, and you repay it in fixed debits until it is gone. The cost is fixed in dollars from the moment you sign. Paying it back faster does not reduce what you owe. It only makes the money leave sooner.
Interest is a rate over time. An advance's cost is a fixed amount over however long the repayment takes. Compress that repayment into a short window and the effective annual cost climbs steeply, because you are paying the same fee for the use of the money over far fewer months.
The arithmetic, illustrative. $100,000 advanced at a factor of 1.35 means $135,000 repaid. If that is collected over roughly nine months, you have paid $35,000 for the use of an amount that was, on average, well under $100,000 across the period, because the balance falls with every debit.
Work it as an annualised cost on the average balance outstanding and the figure typically lands far above what the same business would pay on ordinary term debt. That gap is the question worth asking.
The quoted number tells you what you owe. It does not tell you what it costs.
Before the price, read the reconciliation clause. An advance is meant to flex with your receipts: slower month, smaller debit. Whether that actually happens depends entirely on how the clause is written.
Discretionary reconciliation language is worth noticing. Courts have looked at whether a reconciliation right is genuine, whether the term is finite, and what recourse exists in bankruptcy, when deciding whether something described as a purchase is really a loan.
The instinct is to take another advance to cover the first. That is the single most expensive move available, and it is where businesses that were merely tight become businesses that are genuinely stuck.
The route out is ordinary: understand the true blended cost of everything you owe, get the file into a state a bank will read, and refinance into term debt with a fixed end date. It is slower than a phone call and it is worth the weeks it takes.
If you want the arithmetic on your own numbers, the calculator will run it in your browser and send nothing anywhere.
Written by Valoris Consulting. General information for owner-run businesses, not financial, legal or tax advice for your particular situation.