You’ll meet a factor rate the moment you look at a merchant cash advance for your cash flow. It’s a cost multiplier the lender uses instead of an interest rate, and the difference matters more than the name suggests.
You should treat it as the most misread number in working capital finance, and we rate it exactly that. A loan charges interest on the falling balance over time; a factor rate is applied once and locks in a fixed total the moment you sign.
What a Factor Rate Is
You repay £1.30 for every £1 you receive at a factor rate of 1.30. Borrow £20,000 and you owe £26,000, and that figure doesn’t move — clear it in three months or drag it across twelve, you still repay £26,000.
You’ll see factor rates written as a decimal, typically 1.10 to 1.50 in the UK market. The lower the rate, the cheaper the advance: 1.10 means you repay 10% more than you borrowed, 1.50 means half as much again.
| Factor rate | On £10,000 | On £20,000 | Cost of borrowing (£20,000) |
|---|---|---|---|
| 1.10 | £11,000 | £22,000 | £2,000 |
| 1.20 | £12,000 | £24,000 | £4,000 |
| 1.30 | £13,000 | £26,000 | £6,000 |
| 1.40 | £14,000 | £28,000 | £8,000 |
| 1.50 | £15,000 | £30,000 | £10,000 |
Why Lenders Use Factor Rates Instead of APR
You can’t set an APR without a repayment period, and an MCA has no fixed schedule. Repayments come out as a percentage of your daily card takings — the holdback sweeps its slice every Friday afternoon — so clearing the balance bends with your cash flow.
The commercial angle is less flattering, and you pay for it. A factor rate of 1.30 reads like a manageable mark-up on the page, but expressed as an APR over a typical six-month repayment it’s well over 50%. We rate that gap the reason the format persists.
You get no APR by law on an MCA, because it’s a purchase of receivables, not regulated consumer credit. That doesn’t make the factor rate deceptive, but it does put the work of comparing on you.
How to Convert a Factor Rate to an Approximate APR
You need to estimate the repayment period first, because the APR depends on it. Most merchant cash advances clear in four to twelve months, depending on the holdback percentage and your cash flow.
Then you work three steps: subtract 1 from the factor rate for the cost proportion, divide by the repayment period in years, and multiply by 100 for an approximate APR.
You can see it on a £20,000 advance at 1.25: the cost proportion is 0.25, and cleared in six months (0.5 years) that is 0.25 divided by 0.5, which is 0.50, an approximate 50% APR.
You’d push that approximate APR to 100% by clearing the same advance in three months — when the December rush lands and sweeps the balance clear by quarter-end, it does exactly this. Repayment speed matters enormously, and it’s the point most borrowers miss.
The Fixed-Cost Problem
You gain nothing by repaying a factor-rate advance early. Unlike interest, which falls as the balance declines, the factor-rate cost is fixed from day one — clear it in two months and you still owe the same total as if you had taken twelve.
You hit a genuine paradox here. When the Christmas rush lands, strong card sales clear the advance faster, but that pushes the effective APR up because you pay the same fixed fee over less time and it drains your cash flow. Fast repayment is the most expensive outcome.
We rate this the trap to understand before you sign. A factor-rate advance rewards slow, steady repayment and punishes the busy quarter that clears it early. That’s the opposite of how a loan behaves.
Factor Rate vs Interest Rate: Key Differences
You should hold the two side by side before you compare any offer, because they behave in opposite ways on almost every axis that affects your cost.
| Feature | Factor rate | Interest rate (APR) |
|---|---|---|
| How cost is set | One-off multiplier on the advance | Percentage of the outstanding balance |
| Does it compound? | No | Yes, over time |
| Effect of time | None — total is fixed | Longer term costs more interest |
| Early repayment | Saves nothing | Reduces total interest |
| Faster repayment | Raises the effective APR | Lowers the total cost |
When Factor Rates Come Up
You will see factor rates mainly on merchant cash advances and revenue-based finance, from providers such as Capify, Liberis, YouLend and 365 Finance. The range is typically 1.10 to 1.50, set by your card-sales strength and trading history.
You’ll also see them on some short-term and bridging-style advances marketed for speed. Wherever you meet one, the rule is the same: it’s a fixed fee, so the headline tells you the total cost but hides the annualised rate.
How to Use This When Comparing Offers
You should convert every factor-rate offer to a total repayable and an effective APR over your realistic repayment period. Only then can you line it up fairly against an APR-priced loan or a cheaper working capital product your cash flow can handle.
Check, too, for the fees you pay on top of the factor rate. Some providers add an arrangement or monthly service fee that the factor rate alone hides, so ask for the all-in total repayable, not just the multiplier.
You should ask the lender three things: the total amount repayable, the expected repayment period, and whether any fee sits outside the factor rate. We find those three answers turn a flattering headline into a number you can actually compare.
Factor Rate FAQs
Is a factor rate the same as an interest rate?
No. A factor rate is a one-off multiplier applied to the advance to fix the total repayable, while an interest rate is charged on the outstanding balance over time. A factor rate doesn’t compound and isn’t affected by how long you take to repay.
Does a lower factor rate always mean a cheaper advance?
On the same advance and repayment period, yes — 1.20 costs less than 1.30. But because the effective APR depends on repayment speed, and some lenders add fees on top, always compare the total repayable and the all-in cost, not just the multiplier.
Can I reduce the cost by repaying a factor-rate advance early?
No. The cost is fixed at signing, so repaying early doesn’t reduce it — you owe the same total either way. Repaying faster actually raises the effective APR, because you pay the same fixed fee over a shorter period.
How do I compare a factor rate to a loan APR?
Work out the cost as (factor rate minus 1) times the advance, then annualise it over your expected repayment period to get an approximate APR. Compare that figure against the loan’s representative APR on a like-for-like basis.
Why don’t merchant cash advance lenders quote an APR?
Because an MCA is a commercial purchase of future card takings, not regulated consumer credit, so there is no legal requirement to disclose an APR. There is also no fixed term, so an exact APR cannot be set in advance — only estimated once you assume a repayment period.
Methodology and Disclosure
How we explained factor rates
Scope. We set out how factor rates work, how they convert to an approximate APR, and how they differ from interest, using merchant cash advance provider documentation and our own primary-verified MCA reviews.
Data sources. Factor-rate ranges were checked against provider pricing (Capify, Liberis, YouLend, 365 Finance). The APR conversions are approximate illustrations using a simple annualisation, not quotes, and assume a stated repayment period.
Update cadence. We re-verify the figures on this page when providers change pricing. The verification date reflects the most recent review. Some links on this page are affiliate links; see our editorial policy.
Regulatory note. This page is editorial content, not regulated financial advice. Merchant cash advances are unregulated commercial finance for limited companies, so Financial Ombudsman and FSCS protections may not apply. Compare offers directly with providers before you apply.