How a fixed-cost financing amount is built from a multiplier rather than an accruing rate.
A factor rate is a multiplier applied to the amount advanced to determine the total repayment. It is written as a decimal, such as 1.20, rather than as an annual percentage.
Multiply the amount advanced by the factor rate. For example, $100,000 at a factor of 1.20 results in $120,000 to repay in total across the schedule.
The finance charge is the cost of the financing itself: the total repayment minus the original amount advanced. In the example above, that would be $20,000.
An interest rate accrues on a declining balance over time, while a factor rate fixes the total cost at the outset regardless of how the balance is paid down, before any prepayment terms apply.
The scheduled total is set when the agreement begins, so a borrower knows the full repayment amount in advance instead of watching a balance accrue interest.
The total repayment divided by the number of scheduled payments gives the payment amount, so the amount advanced, the factor rate, and the payment count together set each installment.