How to Read a Funding Offer, Line by Line

Most owners read the headline number first: the rate, or the amount. That is how a good offer and a costly one can look almost the same. The fix is to read the offer in a different order, line by line, with a calculator and one question in mind: what does this cost me, and can my business carry the payment?

Below is a sample offer. The numbers are an example, but the lines are the ones you will see on a real offer.

What is on a funding offer?

Line on the offer	Example
Amount approved	$100,000
Fee taken at funding (2%)	$2,000
Net to your bank account	$98,000
Factor rate	1.25
Total payback	$125,000
Term and schedule	12 months, paid monthly
Payment	$10,417 per month

1. What is the difference between the amount approved and the amount you receive?

The amount approved is the headline. The amount that reaches your bank account can be lower, because fees are often taken out of the funds before they are sent. In the example, a $100,000 approval with a 2% fee puts $98,000 in your account. You repay on the full $100,000, so the fee is part of your cost.

Ask: What is the exact amount that will be deposited? Which fees come out of it?

2. What is the difference between a factor rate and an APR?

Some offers state a factor rate, such as 1.25. Multiply it by the amount and you get the total payback: $100,000 x 1.25 = $125,000. Others state an APR, which spreads the cost over a year and accounts for the term.

A factor rate does not change with the term, but the APR does. The same 1.25 factor rate repaid over 12 months and over 24 months costs the same dollars, yet the effective APR is very different:

	12 month term	24 month term
Factor rate	1.25	1.25
Total payback	$125,000	$125,000
Monthly payment	$10,417	$5,208
Total cost of funding	$27,000	$27,000
Approximate APR	47%	25%

Neither number is wrong. They answer different questions. The factor rate tells you the total cost. The APR tells you how expensive the money is for each year you hold it. To compare two offers fairly, put both on the same footing: total payback, cost, and approximate APR.

Ask: What is the total payback? What is the APR or approximate APR? Is the rate fixed?

3. How should you check the payment schedule?

Look at how often you pay (daily, weekly or monthly) and how big each payment is, then compare it with your deposits. If the example payment is $10,417 a month and your business deposits $60,000 a month, the payment takes about 17% of deposits. That may be comfortable for a business with healthy margins and tight for one without.

Pay attention to timing too. A weekly payment that lines up with a slow week can hurt more than the same total paid monthly.

Ask: When does the first payment start? Can the schedule be changed to match how my cash comes in?

4. What is the total cost of funding?

Total cost is what you repay minus what you received. In the example: $125,000 payback minus $98,000 received = $27,000. That is about 28 cents for every dollar that reached your account. This is the single most useful number for comparing offers, because it does not depend on how the rate is expressed.

5. What fees can appear?

Common ones are an origination or underwriting fee, a documentation fee, and charges for late or missed payments. Some come out of the funds, some are added to the payback. Ask for every fee in writing and where it is charged.

6. What happens if you pay it off early?

Paying early can reduce what you owe, or it can change nothing, depending on how the agreement is written. Some programs include an early payoff discount on the remaining balance. Others require you to pay the full payback regardless of when you finish.

Ask: If I pay off early, how is the payoff amount calculated? Is there a discount? Can I see an example?

7. What are you guaranteeing, and is there collateral?

Read the sections on personal guarantees and collateral. Many programs do not require collateral. Some, including some long-term programs, may. A personal guarantee means you are personally responsible if the business cannot pay. You should know which applies before you accept.

8. What can you ask to change?

More than most owners think. The term, the payment frequency, the amount and sometimes the fees can all be adjusted. Having more than one offer in front of you makes the conversation easier, because you can see what a different structure would cost.

Questions owners ask about reading an offer

What is a factor rate?

A multiplier applied to the amount to find the total payback. A factor rate of 1.25 on $100,000 means you repay $125,000.

Is a lower payment always better?

No. A longer term lowers the payment but can raise the total cost. Compare the total cost and the payment together.

How do I compare two offers with different structures?

Put both on total payback, total cost, net funds received and approximate APR. Our cost calculator does this for two offers side by side.

What should I do if I do not understand a term?

Ask for it in writing and ask for an example with real numbers. A clear offer can be explained in plain language.