This calculator will turn the factor rate and any fees you have been quoted in to the annual percentage rate (APR). It's important to know the actual costs so you can weigh up the opportunity cost vs the cost of the loan.
We are most commonly aware of percentage rates being presented to us as an annual percentage rate (APR). Small business loan lenders are sometimes using "factor rates" which are expressed as a decimal (ie 1.3).
First we calculate the interest payable by multiplying the loan amount by the factor rate and calculating the difference [i.e. 20,000 x 1.3 = 26,000, interest = $6,000]. Then we divide the interest by the loan amount to get a decimal [i.e. $6,000 / 20,000 = 0.3]. We want to know what the interest rate is when annualised, so we multiple this decimal by 365 [i.e. 0.3 x 365 = 109.5]. We then divide this by the term (in days) [i.e. 109.5 / 180 = 0.6083] which is 60.83% – the annualised interest rate. To calculate the APR (annual percentage rate) we use the frequency of repayments as how frequently interest on the loan compounds (daily, weekly, fortnightly or monthly). We then calculate the number of payments [i.e. 130 daily repayments for a 180 day term, based on ~22 repayments per month], repayment amount [i.e. $199.73 per day] and interest per frequency [i.e. 0.42% per day] to build an amortisation schedule to calculate the effective APR [i.e. 0.42 x 22 x 12 = 110.88%]. Finally we calculate the fees and charges payable over a year [i.e. $620]. This is then divided by the loan amount [i.e. 620 / 20,000 = 0.031]. And then multiplied by 365 [i.e. 0.031 x 365 = 11.315]. And then divided by the term in days [i.e. 11.315 / 180 = 0.0629] which is 6.29%. This figure is added to the effective APR we calculated earlier [i.e. 110.88 + 6.28 = 117.16%] to give us our final effective APR.
