Know Your debts – Interest vs Rate Factor
These days small , medium-sized businesses have many funding options at their disposal. From traditional term loans and lines of credit, to capital advances and factoring loans, it's hard to know how to compare each of these loan products. One surefire strategy is to compare the total cost of funds. In to determine the overall cost and payback you need to look into the interest vs rate factor.
Two of the most common cost metrics used would be the Apr (APR, or rate of interest), and the Rate Factor, sometimes known as a flat rate, or simple interest.
What is “Factor Rate”?
A factor rates are expressed like a decimal figure and never in percentages the way in which rates of interest are calculated. The decimal figure typically ranges from 1.09 to at least one.47. This determines how much you need to pay back in your business loan.
Many business owners are less familiar with a Rate Factor. An easier method to think about this rates are it's just a flat rate charged around the funds borrowed.
Factor Minute rates are more commonly of a Business Cash Advance (or Working Capital Advance) where repayments are made daily or weekly using a business' merchant processor or via a daily ACH debit out of your banking account.
What is “Interest Rate”?
Interest Rates are the part of your company loan that is charged as interest. This is expressed as an apr (or APR) of the outstanding loan balance per pay day.
Most folks are familiar with an APR; it's employed for home mortgages, automotive loans, charge cards, commercial property and traditional business loans like a line of credit, SBA Loan, or equipment financing.
How is “Factor Rate” calculated?
Calculating your Factor Rates are relatively simply, just multiply your advanced amount by the factor.
Here is an example:
Advance Amount: $100,000
Rate Factor: 1.25
Term: 12 months
Daily or Weekly Payment Options: $496 Each Business Day, or $2,604 Weekly
Total Repayment: $125,000
Advanced Amount Calculator utilizing a Factor Rate
Enter your advanced amount, factor rate, and monthly terms below to find out your payback and daily (or weekly) payments.
How is “Interest Rate” calculated?
Calculating interest rates are a bit more detailed then the factor rate. Lenders us an amortization schedule to sort out your monthly payment and total repayment. so, every month you are able to figure out what that payments interest is going to be using the following calculation:
Here is an example:
Loan Amount: $100,000
Interest Rate (APR): 5.25%
Loan Term: 10 Years
Monthly Payment: $1,073
Total Repayment: $128,750
Since your interest rates are recalculated every pay period you can reduce your interest paid by upping your monthly payments.
Loan Calculator using Interest Rate
Enter the loan amount, interest rate, and years to calculate your monthly payments and total repayment.
How Lenders determine your “Factor Rate”?
The factor you are approved at might be according to several business attributes, including (amongst others):
- Length of time in business
- Consistency of revenue
- Average monthly revenue
- Seasonality of the business
How Lenders determine your “Interest Rate”?
Here are a few of the determining factors that go into determining your interest rate:
- Type of loan/funding
- Your credit score
- Payment history
Rate Factor Advantages & Disadvantages
Advantages: Quick processing time (1-3 business days); Unsecured; Personal credit not really a primary factor; Minimal time in business required (Six months).
Disadvantages: Shorter terms; a greater relative APR (due to unsecured nature); A lot more frequent remittances (daily or weekly)
Interest Rate Advantages & Disadvantage
Advantages: Repayment amortized over longer terms (smaller payment per month); Usually secured, permitting lower interest rates;
Disadvantages: Typically, a slower process (weeks to 6+ months); Business proprietor needs high personal credit rating; Extended period in business required (2+ years); Longer loan term results in higher total repayment.
Which One is Better For the Business?
The kind of funding/loan you are taking out or be eligible for a will determine whether your funding is subject to mortgage loan or factor rate.
Depending on your credit score, time in business, and annual revenue, you may only be eligible for a Working Capital Advance. In this case your funding is subject to a factor rate.
However, if you're eligible for multiple funding/loan options, determining which is perfect for your business really depends upon your needs. Also how quickly you'll need funding and how much you're willing to pay for a business loan/funding.
There can be a number of other factors and/or metrics to think about too while looking for the best kind of funding for your business. In any case, be sure to properly vet any potential lenders by looking into making sure whomever you decide to work with has prior knowledge about the following:
- arranging financing for businesses
- knowledgeable concerning the different loan products that may be available given your company's specific situation
- should be attentive to your requests
You can weigh the benefits and disadvantage interest vs factor rate as outlined above or call one of our Funding Manager's at Small Business Funding for any personalized consultation.