How to Read a Business Loan Offer (APR, Factor Rate, Fees Explained)

I have seen business owners sign offers they did not fully understand because the terms were confusing. Factor rates, APR, origination fees, payment frequency — it can feel intentionally opaque.

This guide walks through a typical offer line by line and gives you the tools to compare offers accurately.

A Sample Offer to Dissect

You applied for working capital and received this offer:

Let me break down what each of these terms actually means and how they affect what you pay.

APR vs Factor Rate vs Simple Interest

These three terms describe the cost of borrowing, but they work very differently. Understanding the distinction is crucial.

Factor Rate Explained

Factor Rate is a multiplier applied to your principal. In the example above: $75,000 x 1.35 = $101,250 total repayment. You pay back $26,250 more than you borrowed.

Factor rates typically range from 1.1 to 1.5 for most products. The lower the factor rate, the less you pay.

Calculating APR from a Factor Rate

To compare a factor rate offer to an APR-based loan, use this approximation:

Approximate APR = ((Factor Rate - 1) / Term in Years) x 2

For a 1.35 factor rate over 12 months (1 year):

• Factor Rate - 1 = 0.35 (the "cost" portion)
• Divide by term: 0.35 / 1 = 0.35
• Multiply by 2 (to account for declining balance): 0.35 x 2 = 0.70
• Approximate APR: 70%

The same factor rate over 6 months would yield an approximate APR of 140%. This is why term length matters so much with factor rate products.

APR (Annual Percentage Rate)

APR includes interest plus fees, expressed as a yearly rate. Unlike factor rates, APR accounts for the declining principal balance as you make payments.

A 10% APR loan means you pay approximately 10% of the outstanding balance per year. As you pay down the balance, your interest charges decrease.

APR is the standard for traditional loans (SBA, bank term loans, lines of credit) and allows apples-to-apples comparison.

Simple Interest

Simple Interest is calculated on the original principal only, regardless of how much you have paid down. $100,000 at 12% simple interest for one year = $12,000 in interest, period.

Simple interest falls between factor rates and APR in terms of true cost.

Payment Frequency: Daily vs Weekly vs Monthly

Payment frequency affects both your cash flow and the true cost of borrowing. Here is how different frequencies compare for a $75,000 advance with a 1.35 factor rate over 12 months:

Daily payments are common with MCAs and some revenue-based financing. They withdraw automatically from your bank account every business day, which can strain cash flow and make expense planning difficult.

Monthly payments give you more control but may come with higher rates or stricter qualification requirements.

Complete Fee Breakdown

Beyond interest or factor rates, various fees add to your total cost. Here is what to look for:

Origination Fees: What You Actually Receive

The funding amount is not what lands in your account. Origination fees reduce your net funding:

• Approved amount: $75,000
• Origination fee (3%): -$2,250
• Net funding: $72,750
• But you repay: $101,250 (based on $75,000)

This means you are effectively paying interest on money you never received. A 3% origination fee on a 1.35 factor rate product actually increases your effective rate by about 4-5%.

Prepayment: MCAs vs Term Loans

One of the biggest differences between MCAs and term loans is what happens when you pay early:

This is critical: With an MCA, paying off early does NOT save you money. The full factor rate amount is owed no matter when you pay. Term loans with simple interest or APR allow you to save by paying early.

Some MCAs offer "early payoff discounts," but these are typically small (5-10% of remaining balance). Always ask about prepayment terms before signing.

Side-by-Side Offer Comparison

Let us compare two real offers for the same funding need:

Despite the MCA having a shorter term, it costs $6,650 more and offers no early payoff benefit. The term loan is clearly better — if you qualify.

Red Flags in Loan Offers

Watch for these warning signs when reviewing offers:

• No APR disclosed — Legitimate lenders provide APR; those hiding it often have high rates
• Vague fee language — "Administrative fees may apply" without specifics
• Pressure to sign quickly — Good offers do not expire in 24 hours
• Stacking penalties — Fees for having other financing
• Confession of judgment clause — Allows lender to seize assets without court process (illegal in some states)
• Personal guarantee on spouse — Spouse with no business involvement should not guarantee

Questions to Ask Before Signing

Before accepting any offer, get clear answers to these questions:

• What is the total amount I will repay?
• What is the APR (not just factor rate)?
• What fees are deducted from my funding amount?
• What is the payment frequency and amount?
• Is there a prepayment penalty? What is the early payoff amount at 6 months?
• What happens if I miss a payment?
• Can I refinance if rates improve?
• Is there a personal guarantee? What does it cover?

Through Liminal, we present multiple offers with standardized comparisons showing APR, total cost, and payment details side by side. No hidden terms, no confusing factor rates without context. You see exactly what each option costs and can make an informed decision.