5 minutes Understanding Your Funding
Overview
Payment-linked advances use factor rates instead of traditional interest rates (APR). This can be confusing if you're comparing SAPI to bank loans. This guide explains what factor rates are, how they differ from interest rates, and how to compare financing options fairly.
What is a Factor Rate?
Definition:
A factor rate is a simple multiplier applied to the advance amount to calculate total repayment.
Formula:
Total Repayable = Advance Amount × Factor Rate
Example:
Advance: £20,000 Factor Rate: 1.30 Total Repayable: £20,000 × 1.30 = £26,000 Cost of Financing: £26,000 - £20,000 = £6,000
Key characteristic:
Factor rates are fixed and simple. You know from day one exactly what you'll repay—no compound interest, no changes over time.
What is an Interest Rate (APR)?
Definition:
Annual Percentage Rate (APR) is the yearly cost of borrowing, expressed as a percentage, that compounds over time.
Formula:
More complex—includes interest that accumulates on the outstanding balance over time.
Example:
Loan: £20,000 APR: 10% Term: 12 months Total Repayable: ~£21,100 (with monthly compounding) Monthly Payment: ~£1,758
Key characteristic:
APR accumulates over time. The longer you take to repay, the more interest you pay.
Key Differences
1. Calculation Method
Factor Rate:
- Simple multiplication (£20,000 × 1.30 = £26,000)
- Total is fixed from day one
- Doesn't change regardless of repayment speed
Interest Rate:
- Percentage applied to outstanding balance over time
- Compounds monthly or daily
- Total increases if you take longer to repay
2. Time Impact
Factor Rate:
Whether you repay in 6 months or 18 months, you pay the same total (£26,000).
Example:
Fast repayment (6 months): £26,000 total Slow repayment (18 months): Still £26,000 total
Interest Rate:
Longer repayment = more interest paid.
Example:
12-month loan at 10% APR: £21,100 total 24-month loan at 10% APR: £22,200 total (more interest paid)
3. Payment Structure
Factor Rate (payment-linked):
- Variable daily collections based on sales
- No fixed monthly payment
- Pay more when sales are up, less when down
Interest Rate (traditional loan):
- Fixed monthly payment
- Regardless of revenue
- Miss payment = default
4. Early Repayment Impact
Factor Rate:
Pay off early → may receive discount (e.g., 5% off remaining balance).
Example:
Outstanding: £10,000 Early settlement discount: 5% You pay: £9,500 Savings: £500
Interest Rate:
Pay off early → save future interest (but may have early repayment penalties).
Example:
Outstanding: £10,000 Remaining interest (if continued): £800 Early repayment: £10,000 Savings: £800 interest (but may have £200 early repayment fee) Net savings: £600
Converting Factor Rates to APR Equivalent
To compare payment-linked advances to loans, you can estimate the APR equivalent:
Simple formula:
Approximate APR = ((Factor Rate - 1) / Repayment Time in Years) × 100 Example: Factor Rate: 1.30 Repayment Time: 10 months = 0.83 years APR equivalent: ((1.30 - 1) / 0.83) × 100 = 36% APR If repaid faster (6 months = 0.5 years): APR equivalent: ((1.30 - 1) / 0.5) × 100 = 60% APR If repaid slower (18 months = 1.5 years): APR equivalent: ((1.30 - 1) / 1.5) × 100 = 20% APR
Important: This is an approximation. Payment-linked advances aren't technically loans, so APR comparisons aren't perfect.
When Factor Rates Cost Less Than They Appear
Scenario 1: You Repay Faster Than Expected
Offer estimate: 12 months repayment
Actual: You repay in 8 months (business grew)
Factor rate: 1.30 (equivalent to ~45% APR for 8 months)
Traditional loan at 12% APR for 12 months: Would have paid ~£1,300 in interest
Payment-linked: You pay £6,000 total (fixed)
Loan alternative: £1,300 interest + 4 more months of fixed payments
Winner: Depends on business performance and actual repayment speed.
Scenario 2: Fixed Payment Would Have Caused Cash Flow Crises
Cost of fixed payments:
- Bounced checks: £50-100 each
- Late supplier payments: Damage relationships, lose discounts
- Missed payroll: Staff morale, potential legal issues
- Overdraft fees: £5-10/day
Hidden costs of fixed payments: Can easily add £500-1,000 in fees and relationship damage.
Payment-linked prevents these costs by automatically adjusting to your revenue.
When Traditional Loans Cost Less
If you:
- Qualify for low-APR bank financing (6-12%)
- Have stable, predictable revenue (can confidently afford fixed payments)
- Don't need funds urgently (can wait 4-8 weeks for approval)
- Can provide collateral or personal guarantees banks require
Then: Traditional loans will cost less overall.
Trade-off: Less flexibility, longer approval, stricter requirements.
Understanding Your Total Cost
Example Breakdown
SAPI Payment-linked Advance:
Advance Amount: £20,000 Factor Rate: 1.30 Total Repayable: £26,000 Cost of Capital: £6,000 (30% of advance) Estimated Time: 10 months APR Equivalent: ~36%
What you're paying for:
- £20,000 immediate capital
- Flexible repayment (no fixed payments)
- Fast approval (24-48 hours)
- No personal credit score requirements
- Automatic cash flow protection
Compare to alternatives:
Bank loan at 10% APR:
- Total interest: ~£1,100
- Saves ~£4,900 vs. SAPI
- But requires: Good credit, 4-8 week approval, fixed monthly payments, potentially collateral
Business credit card at 25% APR:
- Total interest: ~£2,500 (if paid off over 10 months)
- Saves ~£3,500 vs. SAPI
- But requires: Good personal credit, manual payments, typically lower limits (£5k-25k)
Factor in hidden costs:
- Opportunity cost of waiting weeks for bank approval: Lost sales, missed growth opportunity
- Cash flow crisis costs if fixed payments strain cash: Bounced checks, late fees, damaged relationships
- Personal stress and time spent managing fixed payments during variable revenue
Factor Rate Ranges and What Affects Yours
Typical SAPI factor rates: 1.15 to 1.50
Lower rates (1.15-1.25):
- Strong payment processing history
- Stable/growing revenue
- Low refund/chargeback rates
- Good credit (business and personal)
- Larger advances (economies of scale)
Higher rates (1.35-1.50):
- Shorter trading history
- Variable or declining revenue
- Higher refunds/chargebacks
- Credit concerns
- Smaller advances (higher relative risk)
Frequently Asked Questions
Q: Why don't you just use APR like everyone else?
A: Payment-linked advances aren't traditional loans—they're purchases of future receivables. The repayment timeline is variable (depends on your sales), making APR calculations imprecise. Factor rates provide clarity: you know exactly what you'll repay.
Q: Is a factor rate of 1.30 good or bad?
A: It depends on your alternatives and circumstances. Compared to bank loans (6-12% APR), it's expensive. Compared to business credit cards (20-30% APR) or other alternative lenders, it's moderate. The value is in speed, flexibility, and accessibility.
Q: Can my factor rate change after I sign?
A: No. Your factor rate is fixed in your agreement. Top-ups may have different factor rates, but your original advance rate never changes.
Q: If I repay really fast (6 months instead of estimated 12), do I pay less?
A: The total repayable stays the same (£26,000 in our example). However, you may receive an early settlement discount (e.g., 5%) if you pay off the balance in a lump sum. Contact [email protected] for a settlement quote.
Q: How do refunds affect my total repayment?
A: Refunds reduce the daily collection basis (we don't collect on refunded sales), extending your repayment timeline. The total repayable amount (£26,000) doesn't change—it just takes longer to reach.
Q: What's a fair factor rate?
A: "Fair" depends on your specific situation. SAPI's rates reflect risk assessment. Factors like strong trading history, stable revenue, and low chargebacks result in better rates. If your rate seems high, ask [email protected] why and whether improving certain aspects (e.g., payment processing history) could qualify you for better terms in future.
Need Help?
Understanding your rate: [email protected] or +44 20 3868 4990
Comparing options: [email protected]
Financial advice: Consult an independent financial advisor or accountant
Need Help?
Email: [email protected]
Phone: +44 20 3868 4990
Business Hours: Monday-Friday, 9am-5pm GMT