Factor rate, APR and total cost
A rate, a factor or a payment amount describes only one part of an offer. Start with what your business actually receives, the total you pay back and when each payment is due.
Use the written disclosure and agreement. This guide and our cost calculator are for education only. They don't quote Fair Square terms, decide eligibility, make an offer or replace an APR or any other disclosure required for a specific transaction.
Four numbers that answer different questions
Net proceeds
Net proceeds are the dollars your business actually receives, or can use, after anything taken out at funding. This can be less than the amount on the offer when fees, payoffs of earlier balances or payments to third parties are deducted.
Total dollar cost
Total cost is what your business pays above the net proceeds under the payment schedule. The simplest comparison counts every required payment and fee shown in the offer.
Total cost = total scheduled repayment − net proceeds
Factor rate, or repayment multiple
A factor rate is a multiplier, not a time-based interest rate. Multiply the amount by the factor and you get the repayment before any other fees: a 1.28 factor on $50,000 means $64,000 paid back. On its own, a factor rate doesn't show how quickly payments come out, and it doesn't give you an annual figure to compare. When fees are taken out at funding, the real multiple on the money you receive is higher than the stated factor.
Annual percentage rate (APR)
APR is a yearly cost measure worked out from the required payments and covered charges, using a set calculation method. Time matters: two offers with the same dollar cost can have very different annual rates if one is repaid much sooner than the other. New York, California and some other states require specific cost disclosures for covered commercial financing, but the rules, exemptions and calculation methods depend on the transaction and the state.
One offer, every number
Here is the same example offer seen through each measure: $50,000 at a 1.28 factor rate, repaid weekly over 8 months, with nothing taken out at funding.
| Measure | What it tells you | In the example |
|---|---|---|
| Net proceeds | What reaches your business account | $50,000 |
| Total repayment | Every scheduled payment added up | $64,000 |
| Total cost | Repayment minus net proceeds | $14,000 |
| Factor rate | The multiplier on the amount | 1.28 |
| Cost per $1 | Total cost divided by net proceeds | $0.28, or 28% of net proceeds |
| Weekly payment | The repayment spread over the term | About $1,846 |
| APR | The cost on a yearly basis, based on payment timing | Depends on the exact payment dates and the required calculation method |
If the term changed but the factor rate stayed at 1.28, the repayment and the total cost would stay the same. Only the payment and the APR would move, which is why a factor rate alone can't tell you how hard an offer will be on your cash flow.
Check an offer with the cost calculator
Our cost calculator turns an offer into dollars. Enter the amount, the factor rate, the term and how often payments are taken, and it shows what you pay back, the payment and the total cost. It doesn't include fees and doesn't calculate an APR, so use it alongside the net amount and the fees in your written offer.
A calculator result is an estimate for comparing offers. It is not an offer or a commitment to fund.
Formulas and assumptions
These are the general formulas behind the measures above. An annualized rate is estimated by finding the rate per payment period, r, at which the net proceeds equal the present value of all n equal payments, then compounding that rate over a year (52 periods for weekly, 12 for monthly or 260 for business-daily payments).
| Measure | Formula |
|---|---|
| Total cost | Total scheduled repayment − net proceeds |
| Cost as a share of net proceeds | (Total scheduled repayment − net proceeds) ÷ net proceeds |
| Average payment | Total scheduled repayment ÷ number of payments |
| Repayment multiple | Total scheduled repayment ÷ net proceeds |
| Rate per period, r | Solve: net proceeds = payment × [1 − (1 + r)−n] ÷ r |
| Effective annualized rate | (1 + r)periods per year − 1 |
The annualized estimate assumes no payment at funding, equal payments, equal spacing, no skipped dates and no other cash flows, with the first payment one full period after funding. It can differ a lot from a legally required APR because of irregular payments, fees, early payoff, weekends, changes to remittances and the rules that govern the calculation. Don't rely on it for a sales-based structure with variable payments, an irregular schedule or charges you haven't included.
How to compare two offers
- Start with the net amount your business would actually receive, not just the headline amount.
- Add every required payment and fee to get the total scheduled repayment.
- Confirm the number of payments and their exact dates.
- Note whether payments are fixed, variable or based on your receipts or sales.
- Check whether paying early lowers the cost, and whether there is a prepayment charge.
- Compare collateral, guarantees, liens, default terms and who services the account.
Don't choose on the lowest payment alone. A lower payment can come from a longer term and a higher total cost. A smaller dollar cost repaid over a very short schedule can put more pressure on your cash flow.
Questions to ask before you sign
- How much will reach my business account after fees and payoffs?
- What is the total of every scheduled payment, including required fees?
- How often are payments taken, and when do they start and end?
- Are the payments fixed, or do they change with my sales or receipts?
- Does paying early reduce what I owe, and is there a prepayment charge?
- Is an APR or other cost disclosure required for this offer, and where is it in the documents?
- Which funding partner is named in the agreement?
Fair Square is a funding marketplace, not a bank or a lender. When you apply, each offer comes back side by side with the amount, payback, payment and total cost, and the funding partner's written agreement controls. Read the funding disclosures.
Sources
This guide explains general arithmetic and cites official disclosure and borrower-safety sources. An accountant or attorney can review your business's specific cash flows and agreement.
General educational information, not financial, legal, tax or accounting advice. It does not describe guaranteed products or terms.
Related guides
Cost is one part of the decision. The structure and the company behind the offer matter too.
See every offer's total cost in dollars.
Apply once and every offer comes back side by side: amount, payback, payment and total cost. A calculator result is not an offer or a commitment to fund.