Understanding APR, factor rates and the total cost of credit

Two offers can look similar on paper and cost very different amounts once you work through them properly. Understanding how APR and factor rates are built, and what they leave out, is one of the most useful skills in comparing business finance.

Summary

• APR expresses the annualised cost of a loan including most fees, letting you compare like-for-like between term loans.
• A factor rate is a simple multiplier used mainly on shorter-term and revenue-based products, and it is not an annualised figure.
• The only number that always tells the truth is the total amount repayable, so ask for it on every offer.
• Watch for fees sitting outside the headline rate, and for how early repayment is treated.

What APR actually measures

Annual Percentage Rate is a standardised way of expressing the yearly cost of borrowing, including interest and most mandatory fees, spread over the term of the loan. It is designed to let you compare two loans of similar structure on a like-for-like basis. In UK consumer lending, APR disclosure is tightly regulated; in business lending it is used more loosely, and not every commercial lender is required to quote it, so you may need to ask directly for it or calculate the total cost yourself.

What a factor rate is

A factor rate is a simple multiplier applied to the amount you borrow to produce the total you repay. A factor of 1.2 on a £50,000 advance means you repay £60,000 in total, regardless of how long it takes. Factor rates are common in revenue-based finance and some shorter-term unsecured lending, where the actual repayment period can vary with trading, which makes an annualised percentage harder to apply meaningfully.

Why you cannot compare them directly

A factor rate says nothing on its own about time, so the same factor rate can represent a very different effective annual cost depending on how quickly the facility is repaid. If a £50,000 advance with a factor of 1.2 is repaid in six months, the effective annualised cost is roughly double what it would be if repaid over twelve months, because the same £10,000 charge is compressed into half the time. This is why a factor rate that looks lower than an APR-quoted loan can still end up more expensive, or cheaper, depending on the real repayment speed.

Fees that sit outside the headline figure

Even where an APR or rate is clearly quoted, check for:

• Arrangement or completion fees, and whether they are deducted from the amount you receive or added on top.
• Valuation or legal fees on secured lending.
• Renewal or facility fees on revolving products such as invoice finance or business credit cards.
• Exit or early repayment fees, which can apply even where the headline rate looks attractive.

The one number that never lies

Whatever the pricing structure, ask every lender for the total amount repayable over the expected term, in pounds. This single figure cuts through APR, factor rates and fee structures, and lets you compare a term loan against a merchant cash advance against an asset finance agreement on the same basis: how many pounds does this cost me, in total, to borrow this amount for this length of time.

Working through a simple example

Say you are weighing up a £40,000 unsecured loan quoted at a representative rate equating to roughly £6,000 of interest over 18 months, against a £40,000 revenue-based advance with a factor rate of 1.2, repayable in an expected 10 months. The loan's total repayable is £46,000; the advance's total repayable is £48,000. The loan costs less in total, but the advance may still suit a business that cannot commit to a fixed monthly repayment, because its cost reflects that flexibility.

Early repayment and how it changes the real cost

Some lenders reduce the interest charged if you repay early, effectively giving you a rebate; others charge a fixed total regardless of how quickly you repay, meaning repaying early does not save you anything beyond the fact the facility is cleared. Our guide to reading a loan offer covers how to spot this clause and why it matters more than many borrowers expect.

How to compare offers properly

• Ask for the total amount repayable in pounds, not just the rate.
• Ask whether early repayment reduces the total cost or not.
• List every fee separately and check whether it is deducted up front.
• Compare the same amount over a similar expected term wherever possible.

Getting offers you can genuinely compare

When you run a quote with Lending Box, we set out the indicative total cost alongside the headline rate or factor, so you are comparing real figures rather than just percentages. We are a broker, not a lender, paid by the lender once a facility completes, and all figures shown are indicative only, subject to lender assessment and approval.