Difference between Interest Rate vs. Factor Rate

Difference between Interest Rate vs. Factor Rate Today, there are a wide variety of funding options available to small and medium-sized businesses. From traditional bank loans and lines of credit to invoice financing and working capital loans, it’s easy to find and compare various loan options to meet your financial needs and budget.

One reliable way to choose the best small business financing is to compare the overall cost of the loan. To determine how much you’ll have to repay in total for your borrowed amount you need to look into the interest rate vs. factor rate.

Difference between Interest Rate vs. Factor Rate Many small business owners are familiar with the term annual percentage rate (APR) or simply interest rates but certain types of business loans represent the cost of funding in the form of a factor

rate. So if you’re planning to apply for a small business loan, it’s significant to know the difference between the two. In this blog post, we’ll explain what makes both different from each other and why every small business owner should care. You can Buy Bonds in India, Purchase Bonds online, invest in bonds online, bond investment India and also know – how to buy bonds in India as well How to invest in bonds online in India and How to purchase bonds in India.

What Are Factor Rates?

The factor rate is expressed in a decimal form and not in the percentages the way interest rates are calculated. These rates usually range from 1.09 to 1.47. Similar to interest rates, this signifies how much you’re going to pay to obtain funding.

Factors rates are most commonly used in short-term business financing like a Merchant Cash Advance, where repayment terms are very short, typically daily or weekly. Factors rates are rarely used in the small business funding space, but they are not difficult to calculate.

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What Are Interest Rates?

The interest rate is one of the most common ways to signify the total amount (interest + principal) you would pay throughout the loan tenure. You’ve probably heard about this term since it’s how the most personal and business loans are priced.

This is expressed as an annual percentage rate (APR) and is used for credit cards, home mortgages, and traditional business loans such as an SBA loan, term loan, line of credit, or equipment financing.

How Factor Rates Are Calculated?

Calculating your factor rate is not as difficult as it seems, you get the total amount by simply multiplying your borrowed amount by the factor rate.

For Example: Principal Amount – $10,000 Factor Rate – 1.25 Term – 18 months Total Repayment – $12,500 Daily Payment – $265 Weekly Payment – $173 How Interest Rates Are Calculated?

The method of calculating the interest rate is somehow a little complicated. However, the most sought-after small business financing options involve charging fixed or variable interest on a set of percentages of the remaining principal at defined, regular intervals.

Here is the general formula to calculate interest on your loan amount: Principal Loan Amount x Interest Rate x Time (aka Number of Years in Term) = Interest For Example Loan Amount – $500,000 Interest Rate (APR) – 7% Loan Term – 10 Years Total Repayment – $850,000

Monthly Payment – $7083 What Factors do Lenders Consider When Determining Your Factor and Interest Rate?

Factor Rate • • • •

Time in the business Consistency of revenue Seasonality of the business Average monthly revenue

Interest Rate • • • •

Type of small business loan Your business and personal credit score Business type and industry Payment history

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Which One is Better For You Small Business?

The greatest factors in determining which rate is best for your small business are the type of business financing you need, creditworthiness, or how soon you need capital. Short-term business loans such as invoicing financing and Merchant Cash Advance with factor rates are great for entrepreneurs who don’t have ideal credit

score and collateral to put up but need immediate cash to run and grow their businesses.

Factor rate financing may be beneficial for your business if you: • Need quick cash to manage day-to-day operations and other short-term business expenses • Want to make a steady and static payment • Recently launched a new venture but has a steady flow of revenue • Have low or no credit score • Don’t have collateral to secure funds On the contrary, the interest rate can be a great option for small business owners who have a relatively better credit score or a little more time before they need working capital.

Interest loan financing may be a great fit for your business if you: • • • • • •

Prefer long repayment terms and lower EMIs Have been in the business for more than 2 years Want to choose and compare from a variety of loans Have an ideal personal and business credit score Have the ability to make payments on time Show healthy business revenue

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Bottom Line No matter how you borrow money for your small business, it will always come with a cost. Loans with factor rates usually take shorter to get approved. The application process is typically more easy and

fast and will require less documentation than financing like traditional bank loans.

Before choosing a loan type, it’s a smart idea to work with a financing professional you trust to help you choose the best loan options as per your current financial needs and budget. Besides, you can apply through an online lending marketplace like online bonds platform to find and compare a variety of loan offers from multiple lenders to see if you should go for interest rate or factor rate.