APR or factor rate — what's the difference?

What APR means in practice

Annual Percentage Rate (APR) expresses the cost of a loan as a yearly percentage of the outstanding balance, incorporating both interest and mandatory fees. Because it is annualised, it allows direct comparison between products of different term lengths — provided the rate structure is similar. For a business term loan repaid over 24 months, the APR tells you approximately how much the loan costs per year relative to what you owe.

APR is most useful when comparing facilities with similar repayment structures: monthly instalments over a defined term. It becomes less meaningful when comparing a 12-month term loan with a 90-day working capital facility, because the annualisation distorts short-term products.

What a factor rate means in practice

A factor rate is a multiplier — for example, 1.25 — applied once to the amount you borrow. If you draw £50,000 at a factor rate of 1.25, the total repayable is £62,500 regardless of how quickly you repay. Unlike interest on a term loan, the cost does not reduce if you repay early in most factor-rate structures: you owe the full multiplied amount from day one.

This is an important distinction. Early repayment on a factor-rate product rarely saves money unless the agreement explicitly includes a rebate. Check the terms carefully. See also Will I pay a charge to repay early?

Converting between the two for comparison

To compare a factor-rate product with an APR-quoted loan, you need to convert the factor rate into an approximate equivalent annual cost. Divide the total cost (borrowed amount × factor rate minus borrowed amount) by the borrowed amount to get the flat rate, then apply a standard conversion formula based on the repayment period. Most business finance brokers or comparison tools can do this automatically.

The conversion is illustrative rather than precise, because factor-rate products often have daily or weekly collection schedules tied to revenue, making the effective term variable. Illustrative figures here are not a quote; your actual cost depends on your specific facility terms.

Which structure suits which situation

APR-quoted term loans suit businesses that want a fixed monthly commitment over a known period — machinery purchase, office fit-out, or a defined expansion project. Factor-rate products are more common for short-term working capital needs where the business prefers flexible or revenue-linked repayments rather than fixed monthly sums.

Neither is inherently cheaper. The right structure depends on the trading pattern of your limited company and how the repayment schedule aligns with your cash flow.