If you have ever compared two business loan offers and felt like they were written in different languages, you are not imagining it. One lender quotes an interest rate. The other quotes a factor rate. Both might say “15”, and they are not remotely the same price. This guide explains the difference in plain terms, shows you the maths on a real example, and gives you the one number that lets you compare any two offers fairly.
The short version
- An interest rate is charged on the balance you still owe, so the cost falls as you repay.
- A factor rate is a fixed multiplier applied to the amount you borrow on day one, so the total cost is set before you make a single repayment.
- Because of that, a factor rate of 1.15 on a 12-month loan costs roughly the same as an interest rate of 27 to 28% per annum, not 15%.
- The fair way to compare offers is total repayable over the same term, or the equivalent annual rate.
What a factor rate actually is
Most unsecured business lenders in Australia, and almost all short-term and cash-flow lenders, price their loans with a factor rate. It is written as a decimal, usually somewhere between 1.10 and 1.40. You multiply the amount you borrow by the factor rate and that is the total you repay. There is no compounding and no separate interest calculation.
Borrow $50,000 at a factor rate of 1.15 and you repay $57,500. Spread over 12 months that is about $1,106 a week. The $7,500 difference is the cost of the loan, and it is fixed on day one.
Lenders like factor rates because they are simple to quote and simple to collect, especially with daily or weekly direct debits. Borrowers often like them too, because the total is clear. The catch is that the headline number invites a comparison with interest rates that does not hold up.
Why 1.15 is not 15% per annum
With an interest rate, you only pay interest on what you still owe. On a 12-month loan you have the full $50,000 for the first week, but by month six you owe roughly half of it, and by the last repayment you owe almost nothing. On average across the year you have use of about half the money.
A factor rate ignores that. You pay the full 15% on the full $50,000 even though you only had the full $50,000 for a few days. To pay $7,500 in interest on a balance that averages around $25,000 over a year, the annual rate has to be close to 28%. That is the number you should hold in your head when a factor rate is quoted.
| Loan | Quoted as | Total repayable | Cost of the loan | Equivalent annual rate |
|---|---|---|---|---|
| $50,000 over 12 months | Factor rate 1.15 | $57,500 | $7,500 | About 27.5% p.a. |
| $50,000 over 12 months | Interest rate 15% p.a. | About $54,150 | About $4,150 | 15% p.a. |
| $50,000 over 6 months | Factor rate 1.10 | $55,000 | $5,000 | About 34% p.a. |
The third row is the one that catches people. A factor rate of 1.10 sounds cheaper than 1.15, and in dollar terms it is. But because the term is half as long, the annualised cost is higher. Short loans with low factor rates are often the most expensive money on the table per year.
The one number to compare: total repayable
You do not need to convert anything in your head. Ask every lender the same two questions and write down the answers side by side:
- What is the total amount I will repay over the life of the loan, including every fee?
- What is the term, and what is the repayment per week or per month?
Two offers with the same term can be compared on total repayable alone. Two offers with different terms need the equivalent annual rate, which is what our repayment calculator works out for you. Enter the amount, pick the term and move the rate slider until the total matches the quote; the calculator shows the equivalent factor rate and the annual rate at the same time.
Three things that change the real cost
Early payout
With an interest-rate loan, paying out early saves you the remaining interest. With most factor-rate loans it saves you nothing, because the total was fixed up front. Some lenders offer an early payout discount; it is worth asking before you sign, especially if you expect a large payment, a tax refund or a contract settlement during the term.
Establishment and other fees
An origination or establishment fee of 2 to 3% is common and is often deducted from the funds you receive. On a $50,000 loan that means $48,500 lands in your account but you repay on $50,000. Add it to the cost when you compare.
Repayment frequency
Daily and weekly repayments do not change the total you repay on a factor-rate loan, but they do change your cash flow. A $57,500 total over 12 months is about $221 every business day, $1,106 a week or $4,792 a month. Choose the frequency that matches when money comes into your account, not the one that looks smallest.
So which is better?
Neither, on its own. A factor-rate loan from a lender that can settle in 24 hours and asks for six months of bank statements rather than two years of financials is often the right tool for a short, specific need: stock for a confirmed order, a tax bill, a deposit on equipment that pays for itself in a season. An interest-rate loan is usually cheaper over longer terms and when you might repay early. The mistake is not choosing one or the other; it is comparing a 1.15 to a 15% and thinking they are the same.
See what you would actually qualify for
Rates and factor rates vary by lender, by term and by how your business looks on paper. The quickest way to get real numbers rather than ranges is a 60-second eligibility check. It does not affect your credit score, and you see options from a panel of lenders rather than a single quote.
This article is general information, not credit advice. Figures are illustrative; your rate, fees and terms depend on the lender and your circumstances. Credit assistance is subject to lender approval.