A 1.35 factor rate is not 35% interest. It's closer to 70–90% APR — and the reason why is the single most useful piece of arithmetic in this industry.
The number you're shown
Working capital advances aren't priced in interest. They're priced with a factor rate, usually somewhere between 1.2 and 1.5. The math looks simple: multiply the advance by the factor and that's what you repay.
Borrow $100,000 at a 1.35 factor, repay $135,000. The cost is $35,000. Most owners see that and mentally file it as "35% interest," which sounds high but survivable — roughly what a bad credit card charges.
That mental filing is wrong by a factor of two or three.
Why the comparison breaks
Interest rates are annualised and calculated on your outstanding balance. As you repay a loan, the balance falls, and interest accrues on less money. A 35% APR loan over a year genuinely costs about 35% of the average balance you're carrying.
A factor rate is a flat fee fixed at signing. It doesn't shrink as you repay. And critically, repayment starts immediately — usually the next business day — and runs daily or weekly. You never have use of the full $100,000 for the full term. By month four you might be carrying half the balance while still owing the entire original fee.
The arithmetic
Take that $100,000 at 1.35, repaid over nine months. That's $135,000 total, drawn in roughly 189 business-day payments of about $714.
Because payments start immediately and reduce the balance continuously, your average outstanding balance across those nine months is roughly half the original — call it $50,000. You're paying $35,000 for the use of an average of $50,000, over three quarters of a year.
Annualise that and you land somewhere around 70–90% APR. Cut the term to six months and the same factor rate pushes past 100%, because you're paying the same fee for less time with the money.
The counterintuitive part: with a factor rate, paying it off faster doesn't save you money unless the contract has a genuine early-payoff discount. The fee is fixed. Repaying a 1.35 advance in four months instead of nine means you paid the same $35,000 for less than half the use — effectively doubling your annualised cost. Always ask whether early payoff reduces the payback amount, and get the answer in writing.
Why the industry prices this way
Partly because these products often aren't legally loans — they're purchases of future receivables, which is what historically kept them outside lending regulation. And partly because 1.35 reads better than 85%.
That's changing. Several states now require commercial financing disclosures that force an APR-equivalent figure onto the term sheet. California and New York led; Utah, Virginia, Georgia, Florida, Connecticut, Missouri and Kansas have followed with their own versions. If you're offered financing in one of those states, you may see the real annualised number. If you're not in one, you'll have to do the arithmetic yourself.
What to ask instead
The factor rate on its own tells you very little. Four questions tell you everything:
- What is the total payback in dollars? Not the rate — the number.
- What is the daily or weekly payment? Then check it against your worst recent week, not your average one.
- How many payments, over what period? This gives you the term, which is what turns a factor into an APR.
- Is there a genuine early-payoff discount? If yes, get the exact reduced payback figure in writing.
None of this means don't take one
An 80% annualised cost is defensible when the money turns fast enough. If a $50,000 advance buys inventory you'll sell in eight weeks at a 40% margin, you've made $20,000 on a deal that cost you perhaps $7,000 in fees over that window. That's a good trade, and no cheaper product would have funded in three days.
The arithmetic matters because it lets you tell that situation apart from the other one — where the money covers a gap that doesn't close, and the daily draw becomes a permanent tax on a business that was already struggling. Same product, same factor rate, completely different outcome.
The number isn't the problem. Not knowing the number is.