[Triton]

What's the equation to figure out the actual APR from a factor rate?

Thanks in advance!

[aredmond]

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 simple

[MCNetwork]

What's the equation to figure out the actual APR from a factor rate?

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.

[CreditGuy]

You have to account for the O-fee as well. A 6 month 1.25 with a 2% O-fee is 54% APR.

[aredmond]

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).

Agreed. It is best to stay away from APR in general when speaking to a client.

[bsmith]

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.

[Cfairbank]

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 simple

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.

[Triton]

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.

Yeah I was just asking for knowledge's sake. I learned the hard way a long time ago to stay away from APR's with a client.

[Michael I]

zach i believe figured it out . but a 1.35 at 12 months does come out to like 60%

[Cfairbank]

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.

[Zach]

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'!

[Triton]

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'!

Zack,

How did you get those numbers? What equation did you use to find them?

[CO1]

With is a 1.93?!

[Zach]

Zack,

How did you get those numbers? What equation did you use to find them?

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-Rate

[bdshaw]

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

[MCNetwork]

Here's a few benchmarks that you can use (assuming one payment per business day):

25% APR
1.13 over 12 months

Am I the only one that sees that this math doesn't make sense? If a merchant takes $100,000 and pays back $113,000 over 12 months, how does that equal 25% APR?? It should equal 13% APR.

[Cfairbank]

Am I the only one that sees that this math doesn't make sense? If a merchant takes $100,000 and pays back $113,000 over 12 months, how does that equal 25% APR?? It should equal 13% APR.

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!).

[bdshaw]

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.

[Zach]

Am I the only one that sees that this math doesn't make sense? If a merchant takes $100,000 and pays back $113,000 over 12 months, how does that equal 25% APR?? It should equal 13% APR.

It is 13% simple interest, which doesn't take principal reduction into account

[MCNetwork]

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?

[Cfairbank]

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?

Depends on the amortization schedule, but an installment loan (which would have the same schedule as a perfectly performing ACH cash advance) would be right around $500 (assuming 260 days, $509).

[bdshaw]

Depends on the amortization schedule, but an installment loan (which would have the same schedule as a perfectly performing ACH cash advance) would be right around $500 (assuming 260 days, $509).

Carl is correct. My suggestion is you invest less than $100 in an HP 12C calculator.

[MCNetwork]

Carl is correct. My suggestion is you invest less than $100 in an HP 12C calculator.

Why? I've closed several hundred cash advance deals and this APR problem never came up

[J.Celifarco]

What's the equation to figure out the actual APR from a factor rate?

Thanks in advance!

why would you ever want to talk to a merchant looking for a MCA product in APR terms.. If a merchant brings up APR the first thing out of your mouth should be that it doesnt apply to our products.

[Funder Mark]

Perfect response, this really should be the end of the topic.