What Does Factor Rate Mean In Commercial Finance?
A factor rate when used in finance, is used to calculate the cost of borrowing as a fraction.
This can be used to calculate the total cost of borrowing over a given period and the total repayment amount.
The factor rate includes the original borrowing amount (i.e. 1) and the cost of the borrowing, usually the margin charged by the lender.
Please see the worked example below.
Factor Rate Example
Finance or Loan Amount: £100,000
Factor Rate: 1.21
Cost of Borrowing: (£100,000 x 1.21) – £100,000 = £21,000
Total Repayment Calculation: £100,000 x 1.21 = £121,000« Back to Glossary Index