Small business funding costs: how to compare an offer
Updated September 9, 2026
A headline rate can make two very different offers look alike. Ask the provider to show the arithmetic on your exact amount and payment schedule, then test the payment against a slower month—not only an average month.
Short answer
The cost of funding is the full amount paid to obtain and use capital, including the difference between proceeds and total repayment plus every disclosed fee. Compare offers using dollars and timing: amount received, total remittance or repayment, payment frequency, expected duration, fees and what happens if revenue changes.
Factor rate is not an interest rate
A factor rate multiplies the purchased or advanced amount to calculate a fixed total remittance. For example, $50,000 at a factor of 1.30 produces $65,000 in total remittance, or $15,000 more than the amount advanced before any separate fees. It does not behave like an annual interest rate, and it should not be compared to APR without understanding the different contract structures.
A loan may quote an interest rate and amortize principal over time. A line may charge interest or a draw fee only on what is used. A receivables purchase may state a total remittance and a collection percentage or fixed schedule. Use the contract’s own definitions and ask for a dollar example.
Build a complete cost comparison
- Net proceeds: how much reaches the business after origination, wire or other upfront charges?
- Total repayment: what is the full amount the business is expected to send?
- Payment burden: what is the daily, weekly or monthly amount, and how is it collected?
- Duration: what is the expected time to satisfy the obligation under the stated schedule?
- Other charges: are there renewal, maintenance, late, default, broker, legal or reconciliation fees?
- Early payoff: does paying early reduce the cost, and is there a written payoff calculation?
Stress-test the payment
Write down average monthly deposits, fixed operating expenses, existing debt or financing payments and owner draws. Then model a month with lower sales, slower receivables or an unexpected repair. If the new payment leaves no room for payroll, taxes and ordinary volatility, the amount is too high even if the offer is approved.
Do not assume a percentage-based collection automatically makes a product affordable. A slower month may reduce collections but still leave rent, payroll and other fixed obligations due. Ask how reconciliation works, who can request it and whether the agreement includes a minimum payment.
Get the final terms in writing
Before signing, keep the final agreement, disclosure and payoff information together. Confirm the legal name of the funder, the amount, total repayment or remittance, payment schedule, collateral or guarantee language, default triggers and cancellation rights. If the written terms differ from the sales conversation, stop and ask for an explanation.
Sources and further reading
- Federal Trade Commission — Credit and loans — General consumer guidance on comparing credit costs and reviewing loan terms; commercial products can have different rules.
- U.S. Small Business Administration — Fund your business — A government overview of funding types and questions to consider.
- Consumer Financial Protection Bureau — Small business lending data — Public resources on transparency and small-business lending data.