Factor rate financing doesn’t typically extend to a year, so calculating an annual fee isn’t comparing apples to apples. However, if you’d like to see what your factor rate would equate to in terms of annual interest, here are the steps you’ll need to take.
Using our example above, with a $20,000 merchant cash advance at a 1.2 factor rate, you’d pay a total of $24,000, or $4,000 in financing.
Take the financing cost ($4,000) and divide it by the original advance amount ($20,000): in other words, $4,000 ÷ $20,000, which equals 20%.
$4,000 ÷ $20,000 = 20%
We’d then take that percentage rate (20%) and multiply it by the total number of days in a year, 365. This would give us 73.
.20 X 365 = 73
Finally, take that number and divide it into the total repayment period.
Let’s say our merchant cash advance is due in 6 months. We’ll assume 30 days a month, or 180 days. In other words, 73 divided by 180 would give us an estimated annual interest rate of 40.6%.
73 ÷ 180 = 40.6