A factor rate is a pricing method used for merchant cash advances and some short-term business loans. It is expressed as a decimal multiplier (e.g., 1.25) applied to the advance amount to calculate the total repayment. It is not an interest rate and cannot be directly compared to an APR without additional calculation.
How It Works
A factor rate of 1.25 on a £20,000 merchant cash advance means the total repayment is £25,000 (£20,000 à 1.25). The £5,000 difference is the lender’s cost. This is fixed at origination â it does not change based on how quickly or slowly you repay.
Repayments are typically taken as a daily percentage of card sales: fast months see larger repayments; slow months see smaller ones. The total repayment (£25,000 in the example) remains constant regardless.
Factor Rate vs APR
Factor rates cannot be directly converted to APR without knowing the repayment timeline. The effective APR of a merchant cash advance depends entirely on how quickly the advance is repaid:
- If repaid in 3 months, the effective annual rate is very high
- If repaid in 12 months, the effective annual rate is lower
This makes like-for-like comparison with interest-rate products difficult. To compare a merchant cash advance with a business loan, calculate the total cost of each option in pounds.
Typical Range
Factor rates typically range from 1.09 to 1.5 [VERIFY current market range from lender published terms before publication], with the specific rate depending on the borrower’s risk profile and sales history.
Related Terms
- Merchant cash advance: the product most commonly priced with factor rates
- APR: interest-based pricing method used for loans
- Total cost of credit: total repayment minus advance amount