Direct answer
The cost of business financing is the total amount you repay above what you receive, expressed either as a factor rate, an interest rate, an APR, or a discount fee depending on the product. Those four are not interchangeable, which is why two offers that look similar on paper can differ substantially once you do the arithmetic. The reliable way to compare them is to convert every offer into two numbers: total dollars repaid, and dollars repaid per week.
Why financing costs are quoted four different ways
Different products underwrite different things, so they price differently, and the industry never standardized the language.
Interest rate. You borrow a principal amount and pay interest on the balance that is still outstanding. As you pay the balance down, the interest portion shrinks. Term loans and lines of credit are usually quoted this way.
APR. Interest plus the fees that come with the money, annualized into one number. APR exists so borrowers can compare offers, which is why bank and SBA financing is quoted this way.
Factor rate. Used for revenue advances and some short-term products. A multiplier is applied once to the advance amount. The total repayment is fixed at the start and does not shrink as you pay down.
Discount fee. Used in invoice factoring. The factor advances most of an invoice, collects from your customer, then keeps a fee before releasing the rest. The fee usually scales with how long the invoice takes to get paid.
How do I compare a factor rate to an APR?
Do not compare them directly because they measure different things. Convert both into total dollars and time instead. For any offer, write down:
- What actually lands in your account after any origination or closing fee is deducted
- The total dollars you will repay across the full term
- The payment amount and its frequency, daily, weekly, or monthly
- Whether repaying early reduces the total, and by how much
Number two minus number one is your cost of capital in dollars. The payment frequency is your cash flow impact. A cheaper total that requires daily payments can hurt a seasonal business more than a costlier total on monthly terms.
Worked example, arithmetic only, not an offer or a quote
Suppose a business is offered $100,000 at a 1.2 factor rate over ten months, with a 3 percent origination fee. Cash received is $97,000 after the fee. Total repaid is $120,000. Cost of capital is $23,000. Weekly payment is roughly $2,769 across about 43 weeks. Run this same arithmetic on every offer you get, including ours.
What fees should I expect besides the rate?
The rate is rarely the whole price. Ask specifically about:
- Origination or closing fees, usually deducted from the amount that reaches your account
- Underwriting, documentation, or processing fees
- UCC filing fees on secured products
- Servicing or maintenance fees on lines of credit, which can apply whether or not you draw
- Prepayment terms, which may or may not reduce the total
- Appraisal or valuation costs on collateral-backed products
None of these are red flags on their own. Undisclosed ones are. A lender that will not put the full fee schedule in writing before you sign is telling you something.
Cost structure by financing type
| Financing type | Priced as | Repayment cadence | Early payoff helps? | What drives the price |
|---|---|---|---|---|
| Revenue advance | Factor rate | Daily or weekly | Sometimes, via a negotiated discount | Deposit consistency, time in business, risk tier |
| Business term loan | Interest rate or factor rate | Weekly or monthly | Sometimes | Credit, revenue stability, term length |
| Business line of credit | Interest on drawn balance | Monthly, interest on what you use | Yes, you stop paying when you repay the draw | Revenue, credit, utilization |
| SBA loan | APR | Monthly | Yes | Credit, collateral, program rules |
| Equipment financing | Interest rate | Monthly | Yes | Equipment value, age, dealer, and credit |
| Asset-based financing | Interest rate, bank-style | Monthly, often interest-only periods | Yes | Collateral value and profitability |
| Invoice factoring | Discount fee per invoice | As invoices are collected | Not applicable, cost tracks collection time | Customer creditworthiness and days to pay |
Products that fund fastest and ask the least of you generally cost the most, because speed and light documentation are themselves priced. Products where cost scales with time, like a line of credit or factoring, reward discipline in a way fixed-total products do not.
Why is short-term financing more expensive?
Because the lender is pricing risk and time, and short-term products carry more of both per dollar lent. There is less operating history to underwrite against, less collateral, and a shorter window to recover the money. The same business can be quoted differently across two products on the same day because they answer different questions.
The cheapest available product is not automatically the right one. A twenty-year SBA loan is less expensive over its life than a ten-month advance and takes two months or more to close. If the money is needed for a contract that starts in three weeks, the real comparison is between the options you can realistically get in the time you have.
When is expensive capital still the right call?
When the capital produces more than it costs, and the payback window is realistic. An advance that costs $23,000 to fulfill a $250,000 contract you could not otherwise take is arithmetic that works. The same advance used to cover a shortfall with no revenue event behind it is how businesses end up stacked with several positions at once, each one taken to service the last. If the numbers do not show a path to repayment, more capital is not the fix, and we would rather tell you that early than place a file that hurts you.
How can I lower what financing costs me?
- Get your documents in order first. Clean, complete bank statements and financials widen the set of products you qualify for.
- Ask for the total dollar cost in writing. Do not settle for just the rate.
- Fix the cash flow story before you shop. Negative days and irregular deposits move you into a higher risk tier.
- Match the term to the use. Financing a five-year asset on a ten-month product creates a cash flow squeeze.
- Ask what early payoff actually does. On some products it saves real money, on others nothing at all.
- Compare two or three real options. That is the part we handle, using your actual numbers.
Frequently asked questions
Related guides
Know the number before you sign
Bring us the offers you already have, or none at all. We will show you the total dollars, payment cadence, and what each choice does to your cash flow. If the right answer is to wait or take a smaller amount, we will say that too.
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