Two offer sheets land on your desk. Same $50,000 advance, one at a 1.28, one at a 1.35. Which is the cheaper money? Most owners answer in half a second. My answer is a question: what is the term on each? Because until you know that, the factor alone cannot tell you, and I have watched the cheaper sheet turn out to be the more expensive money more times than I can count.
Let me show you the math, it is short.
The only math a factor rate does
A factor rate multiplies your advance once. That is its whole job.
$50,000 at a 1.35: 50,000 x 1.35 = $67,500 back. The money cost $17,500, and that number was fixed the moment you signed. No compounding. Nothing accruing by the day. An advance is not a loan where interest builds on a shrinking balance, it is a fixed payback bought at a set price. That one difference drives everything else in this post.
The 1.28 sheet on the same $50,000 pays back $64,000, so $14,000 for the money. Cheaper in dollars, yes. Keep reading.
The clock the sheet leaves off
Time is not in the factor. That is the trap, and it is why merchants misread offers.
Think of the cost in points: a 1.35 is 35 points, a 1.28 is 28. Now divide by the months you will actually be paying.
- 35 points over 10 months = 3.5 points a month.
- 28 points over 5 months = 5.6 points a month.
The “cheap” 1.28 costs your cash flow more per month of use than the “expensive” 1.35! Same desk, same morning, opposite answer once the term shows up. So never compare factors to factors. Compare cost per month to cost per month, and put the estimated debit schedule next to your deposits while you are at it.
One more honesty check, because I would rather you hear it from me: the per-month division flatters the real rate. Daily or weekly debits start returning the money immediately, so you never hold the full $50,000 for the full term - on average you are holding roughly half of it. Annualize on the balance you actually held and the effective rate runs well above the naive division. That does not make the structure wrong. It makes the term the single most important line on the sheet.
Run the factor on the net, not the approval
The approval says $50,000. The wire says $47,500, because a $2,500 origination fee came off the top.
The payback did not shrink to match. Still $67,500. So the true multiple on money you can actually spend is 67,500 divided by 47,500, which is a 1.42, not the 1.35 printed on the sheet. Bigger fee, bigger gap.
Thirty second check: total payback divided by the amount that hits your account. That is your real factor. If the sheet will not show you the net, that tells you something too.
Does paying early save anything?
Usually no, and this one surprises people. The payback is fixed, remember. Clear the 1.35 in month three instead of month ten and you still paid $17,500, just for a third of the runway. Your cost per month of use tripled. Feels responsible, prices out worse, haha.
The exception: an early payoff addendum, a written schedule that steps the factor down if you clear the balance inside a window, say a 1.35 dropping to a 1.27 inside 90 days. Ask whether your contract has one before you sign, not after. With one, early payoff is real savings. Without one, spare cash usually works harder in the business than against a payback that cannot get any smaller.
When expensive money wins, and when it loses
The factor sets the dollars. The job decides whether they were worth it.
Win case, a pattern I see monthly: a contractor needs $40,000 of materials to start a job that clears $28,000 in margin inside eight weeks. An advance at a 1.38 costs $15,200. Money in behind the debit: $28,000. Money out: $15,200. He keeps $12,800 he had no way to earn without the buy, and speed was the entire product. If timing is your whole question, I already broke down how fast an advance actually funds.
Lose case, same product, same price: that $40,000 plugs a payroll hole with nothing new coming in behind it. Now the $15,200 is pure cost and the debits squeeze the account that was already short. Robbing Peter to pay Paul, with a fee on top.
Notice the factor was never the villain in either story. The match was. Procrustes kept one bed and stretched or trimmed every guest until they fit it. Grabbing whatever structure funds fastest and forcing the job to fit is the same move. A six week materials turn wants a short payback. A two year buildout wants term money, and if you have runway to compare, run your numbers against the MCA vs SBA math before signing anything fast.
Four numbers before you sign
- Total payback, in dollars. Amount times factor. Write it next to the advance amount so the cost stares at you.
- The true factor on the net. Payback divided by what actually lands after every fee.
- The real term, in months, off the estimated debit schedule. Not the salesperson’s guess, the schedule.
- Cost per month next to the margin of whatever the money funds.
If the job clears the cost with room to spare, the factor did its work. If nothing new comes in behind the debit, no factor is cheap enough. Run those four on both sheets tonight and the cheaper money identifies itself.