The offer
| The same $ for the same months | Cost | Equivalent annual rate | Notes |
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The real annual rate is the internal rate of return of the repayment schedule, annualised, which is how a comparison rate on a regulated loan is worked out. Unsecured business loans are not regulated consumer credit, so no comparison rate has to be quoted, which is why the factor rate is used. The alternatives are indicative; an overdraft needs security and takes longer to arrange, and invoice finance needs business customers on terms.
Why the factor rate reads low
A 1.2 factor over six months means paying $10,000 to use $50,000. But you do not have the $50,000 for six months: the first repayment is taken the next business day, and by the halfway point you have repaid half. On average you have about half the money for the term, so the cost is charged on about $25,000 for six months, which is close to 80 per cent a year before the fee. Shorter terms make it worse: the same 1.2 over three months is well over 100 per cent annualised.
None of that makes the product wrong in every case. A defined, short gap that earns more than it costs, a supplier discount for early payment that beats the rate, or a deal that cannot wait for an overdraft to be approved, can each justify it. What does not work is using it as a standing facility, because the cost compounds every time it is renewed.
What the alternatives need
- Overdraft or line of credit. Security, usually property or a general security over the business, two years of financials, and two to four weeks to set up. Interest only on the drawn balance.
- Invoice finance. Business customers on terms, invoices for completed work, and a debtors ledger the lender can verify. Approved in about a week; grows with sales.
- Equipment finance. Where the money was for a vehicle or machine, a chattel mortgage over it at a fraction of the rate, over its working life. The chattel mortgage calculator shows the repayment.
- Premium funding and ATO arrangements. Where the money was for insurance or a tax bill, each has its own cheaper facility.
The working capital calculator sizes the gap and shows which line fits each part; understanding the true rate first is what makes the choice a calm one.