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02-24-2016, 04:49 PM #1
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Factor Rate to APR Formula
What's the equation to figure out the actual APR from a factor rate?
Thanks in advance!
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02-24-2016, 05:09 PM #2
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With an accelerated payment structure(daily draw) there is no "true" formula in my opinion but a good way to break it down to a client is this. If it is a 4 month 1.20 then it is 60% APR. 1.20 x 3 =1.60 or 60% APR.
A 6 month 1.25 would be 50% APR. 1.25 x 2= 1.50 or 50% etc... pretty simpleSecond place? Set of steak knives.
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02-24-2016, 05:18 PM #3
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That's a trick question. The two are separate animals. The way to pitch a cash advance is to let them know there is no accruing interest rate. Instead they are charged a flat fee for the funds (expressed in the form of a factor). That is how you differentiate a merchant cash advance from a bank product. Once you start turning a factor into an APR, you're on the way to losing the sale. The only exception is if you're pitching a 12 month term. Then the factor is the same as the APR.
Last edited by MCNetwork; 02-24-2016 at 05:21 PM.
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02-24-2016, 05:19 PM #4
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You have to account for the O-fee as well. A 6 month 1.25 with a 2% O-fee is 54% APR.
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02-24-2016, 05:19 PM #5
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02-24-2016, 05:21 PM #6
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He is asking how to calculate, not how to pitch. I have also had this question but unfortunately haven't found any answers better then Credibly1. It's an approximate APR but doesn't match what APR calculators will tell you.
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02-24-2016, 05:23 PM #7
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Factor rates calculate off the beginning balance -- APRs on the outstanding balance. So a rough calculation is what you described above but you also need to multiply it by two. So a 6 month 1.25x would be around a 100% APR. that also doesn't include any fees.
Agree with others, the variability in a cash advance is a different animal and there's a reason it's priced on factor rates not APR.Carl Fairbank
Founder & CEO boldMODE
www.boldmode.com
Carl@boldmode.com
Founder & former CEO of Breakout Capital (sold to SecurCapital in 2019)
www.breakoutfinance.com
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02-24-2016, 06:01 PM #8
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02-24-2016, 06:07 PM #9
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zach i believe figured it out . but a 1.35 at 12 months does come out to like 60%
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02-24-2016, 06:13 PM #10
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Using the IRR function in excel will get you very close to APR.
I don't have excel open, but a 1.35x 12 month deal should be close to 70% APR.Carl Fairbank
Founder & CEO boldMODE
www.boldmode.com
Carl@boldmode.com
Founder & former CEO of Breakout Capital (sold to SecurCapital in 2019)
www.breakoutfinance.com
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02-24-2016, 07:52 PM #11
Here's a few benchmarks that you can use (assuming one payment per business day):
25% APR
1.06 over 6 months
1.10 over 9 months
1.13 over 12 months
1.16 over 15 months
60% APR
1.16 over 6 months
1.24 over 9 months
1.33 over 12 months
1.42 over 15 months
90% APR
1.24 over 6 months
1.37 over 9 months
1.52 over 12 months
1.66 over 15 months
120% APR
1.32 over 6 months
1.51 over 9 months
1.71 over 12 months
1.93 over 15 months
Happy huntin'!Zachary Ramirez – CEO
Phone: 562-391-7099
Email: zach@zacharyjosephramirez.com
1661 N. Raymond Ave #265
Anaheim CA 92801
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02-24-2016, 08:00 PM #12
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02-24-2016, 08:09 PM #13
Factor Rate to APR Formula
With is a 1.93?!
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02-24-2016, 08:14 PM #14
There's a LOT to explain that is beyond the scope of this forum, but this Wiki explains it pretty nicely:
http://www.wikihow.com/Calculate-Annual-Percentage-RateZachary Ramirez – CEO
Phone: 562-391-7099
Email: zach@zacharyjosephramirez.com
1661 N. Raymond Ave #265
Anaheim CA 92801
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02-24-2016, 08:47 PM #15
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Factor Rate to APR Formula
This is really simple.We need to find a high school student studying geometric progressions, or, if I were not so lazy I could calculate the APR on my (archaic) HP 12C. The difficulty is making 182 daily entries. The progression would consist of 5 negative entries followed by 2 positive repeated 26 times. Since fees reduce the amount the customer actually receives the initial investment is the initial principal is the principal less the fees.
Sounds exhausting, someone come up with a 16 year old kid.
Bob
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02-24-2016, 09:14 PM #16
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02-24-2016, 09:28 PM #17
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Because APR is calculated using the outstanding balance, not the initial amount -- Since cash advances/term loans amortize down, your APR would need to be calculated on a decreasing outstanding balance, not the initial balance of 100k. Let's say you are trying to get to a 13% APR for cash advance that pays initial amount daily throughout the term of the deal. Day one, you are taking 13% of 100K. For the last payment, you'd be taking 13% on the then outstanding balance (say $500), not on the initial balance of 100K. In this example of a 13% APR, you are actually receiving around $6,500 in revenue, not $13,000. And this assumes zero fees.
This is why the easiest way to ballpark is to double the annualized factor rate (but as Zach and Bob point out, that is just back of the envelope and it's a more complicated calculation than that but it will get you reasonably close -- do NOT use that calc in any contracts that show APR!).Carl Fairbank
Founder & CEO boldMODE
www.boldmode.com
Carl@boldmode.com
Founder & former CEO of Breakout Capital (sold to SecurCapital in 2019)
www.breakoutfinance.com
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02-24-2016, 09:42 PM #18
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Factor Rate to APR Formula
MC......the reason is that the customer does not get the use of the 100k over the full 12 months. Every payment they make consists of principal and interest reducing the outstanding principal daily in the example.
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02-24-2016, 11:23 PM #19
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02-25-2016, 07:55 AM #20
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So consider the following question:
If principal equals $10,000 and APR equals $10%, how much total interest will you pay at the end of one year (assuming no other charges)?
What is your answer?
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02-25-2016, 08:29 AM #21
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Carl Fairbank
Founder & CEO boldMODE
www.boldmode.com
Carl@boldmode.com
Founder & former CEO of Breakout Capital (sold to SecurCapital in 2019)
www.breakoutfinance.com
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02-25-2016, 10:20 AM #22
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02-25-2016, 10:24 AM #23
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02-25-2016, 10:35 AM #24John Celifarco
Managing Partner
Horizon Funding Group
3423 Ave S
Brooklyn, NY 11234
T: (347) 773-3990 | F: (718) 795-1990
Linkedin: Profile
Email: john@horizonfundinggroup.com
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02-25-2016, 10:39 AM #25
Perfect response, this really should be the end of the topic.
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