What is the difference between APR, Simple Interest or Factoring Rates?

If you walk into a car dealership and the sticker price says $50,000, you know exactly what the car costs.

Business finance isn't like that.

In the Australian lending market, you could have three different lenders all offer you a "10% rate" on a $100,000 loan. Yet, depending on how they calculate that rate, the total amount of interest you pay could range from $5,500 to over $18,000.

How is that legal? It comes down to the different language lenders use to describe the cost of money.

As we head deeper into 2026, with regulatory shifts like Payday Super tightening cash flow, you cannot afford to be paying "hidden" interest. You need to know the true cost of your capital.

Here is the Edelweiss guide to decoding the three most common rate types you’ll see in Construction, Trades, and Allied Health finance.

The Three Rates of Business Lending

When reviewing a Letter of Offer, you need to identify which "Rate" the lender is speaking.

1. The APR (Annual Percentage Rate)

What it is: The Gold Standard. APR is the annualized cost of credit, including both the interest rate and any upfront fees.

How it works: Crucially, APR is almost always calculated on a reducing balance. This means every month when you make a principal repayment, the amount of interest you pay the next month drops because you owe less money.

• The Vibe: Transparent, traditional, usually lower cost.

• Best For: Long-term asset finance (e.g., a new crane or an MRI machine) or commercial mortgages.

2. Simple Interest (or "Flat Rate")

What it is: The "Napkin Math" rate. It’s calculated as a fixed percentage of the original loan amount.

How it works: If you borrow $100k at 10% simple interest for a year, the interest is $10k. Period. It doesn't matter that by month six you’ve paid back half the loan; you are still paying interest as if you had the full $100k in your bank account.

• The Vibe: Easy to understand, but deceptively expensive.

• The Reality: On a standard 12-month loan, a 10% "Simple Rate" is roughly equivalent to an 18% APR.

• The Catch: In Month 1, you have the full $100,000. But by Month 6, you’ve already paid back roughly $50,000. By Month 11, you only have about $9,000 of the lender's money left—yet you are still paying interest as if you had the full $100,000.

3. The Factor Rate

What it is: The Multiplier. You will see this frequently with online fintech lenders and short-term unsecured loan providers. It looks like a decimal, e.g., 1.20.

How it works: It’s not an interest rate; it’s a price tag. You multiply your loan amount by the factor rate to get the total payback amount. Borrow $100k at a 1.20 factor rate? You pay back $120k.

Like simple interest, the cost is "baked in" on day one based on the original amount. There is usually no discount for paying it off early.

• The Vibe: Fast, accessible, but very expensive.

The "Reducing Balance" Secret

Why are Simple Interest and Factor Rates so much more expensive than an equivalent APR?

It’s the Reducing Balance Principle.

Think of your loan like renting a large excavator for a year.

• With an APR agreement, if you return half the excavator after six months, you only pay rent on the remaining half.

• With a Factor Rate agreement, you pay full rent on the whole machine for the entire year, even if it’s sitting unused in their yard for the last six months.

You are paying interest on money you no longer have use of.

The Cheat Sheet: Converting Factor Rates to APR

We often see clients in high-growth phases accept Factor Rate loans because they are fast. Speed has value, but you must understand the cost.

A "1.15 Factor Rate" sounds low. It is not.

Here is a rough guide to converting common 12-month Factor Rates into their true APR equivalent:

If the Factor Rate is...	You pay this much interest on $100k...	The true APR is approx...
1.10	$10,000	~18% - 21%
1.15	$15,000	~26% - 29%
1.20	$20,000	~35% - 38%
1.25	$25,000	~43% - 47%
1.35	$35,000	~59% - 65%

Note: These are estimates for comparison. The exact APR depends on fees and repayment frequency

When to Use Which Rate?

As capital architects, we don't hate Factor Rates. They are just a different tool.

• Use APR structures when you are buying long-term assets that will generate revenue over 3–7 years.

• Consider Simple/Factor Rates only for very short-term emergencies or massive opportunities where speed is the only thing that matters—for example, you need cash in 24 hours to secure discounted materials for a project that starts next week.

The Edelweiss Approach

Never sign a loan document based on the headline number alone. You must ask for the Total Cost of Credit and the Effective APR. If the lender won't tell you, run.

Better yet, let us do the translation for you. We ensure you are matched with the right structure for your business cycle, not just the fastest "yes."

Is your current debt structure choking your 2026 cash flow? Contact Edelweiss Finance today for a confidential review of your facilities.