Two funding offers, same desk, same morning. One is priced at a factor rate of 1.25. The other is quoted at 40% APR. Neither figure tells you which is dearer, because the two do not measure the same thing, and the conversion most UK finance sites publish makes the factor-rate offer look far cheaper than it really is.
It is an expensive misreading, because the cheap-looking conversion is the one most explainers show you. The factor rate is a price in pounds. An APR is a price per year, and it only means anything once you know when each repayment falls due. Get the second half wrong and a 1.25 factor rate that reads like 25% can turn out to cost you nearer 290%.
Factor Rate vs APR at a Glance
A factor rate tells you how many pounds you repay for every £1 advanced. An APR measures the cost of borrowing on an annualised basis, and it accounts for when repayments and relevant charges fall due. A factor rate therefore cannot be compared directly with an APR.
That leaves you one job before you sign anything: convert, then compare. Be careful which conversion you have done, because there are two of them and they give very different answers. Multiplying the fee up to a full year gives you a simple annualised fee rate. Working out what the money costs given the dates you will actually repay gives you an effective annualised cost. Only the second is comparable with a loan APR, and it comes out at more than double the first over a year, closer to triple over three months. We use the second measure throughout this page and label it wherever it appears.
| Feature | Factor rate | APR |
|---|---|---|
| Expressed as | Fixed multiplier, e.g. 1.25 | Annual percentage, e.g. 12% |
| Reflects repayment timing | No | Yes |
| Includes charges | Only the agreed fee. Arrangement and processing charges often sit outside it | Yes, every charge inside the total charge for credit |
| Effect of repaying early | Usually none, because the fee is fixed at the outset. Check the settlement clause | Reduces the cash interest you pay |
| Normally used by | Merchant cash advances, revenue-based finance | Business loans, overdrafts, credit cards |
| Disclosure required by law | No | On regulated credit agreements only |
The Core Difference
The two numbers answer different questions. A factor rate answers “how much will I hand over?”. An APR answers “what is this costing me for the time I have the money?”. You need both, and most offers hand you only one.
What a Factor Rate Tells You
Borrow £20,000 at 1.25 and you repay £25,000. The £5,000 cost is set the day you sign and it does not move, whether you clear the balance in three months or twelve. For budgeting that is genuinely useful, because you know the exact figure that has to come out of the business and you can set it against the return you expect from the stock, the refit or the wage bill it is funding.
What it will not tell you is whether £5,000 is a fair price for that money. A fixed fee carries no time dimension at all, so two advances with the same factor rate and wildly different repayment periods look identical on the paperwork. They are nothing like each other. We priced three of them below, and the gap between the cheapest and the dearest runs to more than 230 percentage points on an identical fee.
What APR Tells You
An APR is a standardised annual measure of what credit costs. Under the FCA’s rules it is worked out by equating the present value of what you draw down with the present value of everything you repay, including the charges that fall inside the total charge for credit (CONC App 1.2). In plain terms, it prices the money by how long you genuinely hold it.
We previously said that an APR falls as you repay the balance. That was wrong. The cash interest charged each month falls because it is calculated on a shrinking balance, but the APR describes the agreement as a whole and does not change.
Why a 1.25 Factor Rate Does Not Mean 25% APR
Almost every UK explainer uses the same shortcut. Take the £5,000 fee on a £20,000 advance, call it 25%, then scale it by the repayment period: 25% over a year, 50% over six months, 100% over three. The arithmetic is sound. The label attached to it is not, and we ran it that way ourselves until August 2026.
What that sum produces is a simple annualised fee rate. It treats the whole £20,000 as though it sits in your account for the entire term, which it does not, because you start handing it back almost immediately. An APR-style figure has to account for that, and once it does the numbers get considerably worse. Calling a simple annualisation an “approximate APR” understates the cost of every factor-rate offer on the market, and it does so in the lender’s favour.
Why Repayment Timing Changes the Cost
Think about what you actually have the use of. On a twelve-month advance repaid monthly, you hold the full £20,000 for a month, then a little less, then less again. Averaged across the year you have had the use of roughly half the money, and you have paid the whole £5,000 for it. That is why our modelling puts the effective cost at about double the simple figure.
Squeeze the same £5,000 into three months and the effect compounds. You are paying a full year’s worth of fee for a quarter of a year’s use of a balance that is falling fast. The factor rate on the paperwork never moves. What it costs you moves a great deal.
Factor Rate to APR: £20,000 at 1.25 Worked Through
Same advance, same fee, three repayment periods. The third column is the figure the industry publishes. The fourth is what we calculate the money actually costs once the repayment dates are taken into account.
| Repayment period | Total repayable | Simple annualised fee | Estimated effective annualised cost* |
|---|---|---|---|
| 12 months | £25,000 | 25% | 53.1% |
| 6 months | £25,000 | 50% | 119.6% |
| 3 months | £25,000 | 100% | 291.5% |
*Illustrative comparison figures, not a statutory APR quoted by a provider. We modelled equal instalments paid at each month end, with the full £20,000 advanced at the outset and no charges outside the agreed fee. A real repayment schedule, an arrangement fee or a daily sweep will each move these numbers.
The cash cost is £5,000 in all three rows. What changes is how long you have the money for, and the simple percentages get the direction right while badly understating how steeply the cost climbs. The same fixed fee gets dearer the faster you repay it, because you are buying less time with the same money. So if a broker offers to shorten your term to get the advance cleared quicker, understand what you are being offered.
It is not a discount.
What Changes When Repayments Follow Your Sales
Most factor-rate finance does not repay in tidy monthly instalments. A merchant cash advance takes an agreed slice of your card takings, so the money comes back in small daily or weekly amounts, and it comes back faster in a good month. That is how Liberis and 365 Finance both structure repayment, which is why the term on a factor-rate advance is an estimate rather than a date. Run the same £20,000 at 1.25 as twenty-six equal weekly payments rather than six monthly ones and the estimated effective annualised cost rises from 119.6% to about 143.8% on our modelling, on an identical £5,000 fee.
Heavy Christmas trading or a busy summer clears a sales-linked advance early, which feels like good news, and in cash terms it is neutral because you still pay the same £5,000. In cost-of-money terms it is the most expensive outcome available to you. Read the settlement clause before you assume otherwise, because a small number of providers rebate part of the fee on early settlement and most do not.
How to Compare a Factor Rate With an APR-Priced Loan
The first two checks below need no assumptions and often settle the comparison on their own, which is why we put them first. Work through them with both offer documents in front of you: they are the difference between comparing prices and comparing labels.
Start with the total repayable. Multiply the advance by the factor rate, then add anything charged separately. Do the same for the loan: the monthly payment times the number of payments, plus the arrangement fee. Two cash totals is the one comparison that needs no assumptions at all, and on a short term it often settles the question on its own.
Chase down every mandatory charge. A factor rate is a multiplier on the advance and it does not automatically cover origination, admin or processing fees. An APR on a regulated agreement has to include them. Compare a bare factor rate against a fully loaded APR and you are marking your own homework.
Put both on the same time footing. Estimate how long the advance will realistically take to clear at your normal takings, not at the provider’s illustration, then work the effective annualised cost over that period and set it against the loan’s APR. If you would rather not do the arithmetic, compare total repayable per month of use instead. It is a cruder measure and it will not mislead you.
Check what happens if you repay early. On the loan, early settlement usually saves you interest. On the factor-rate deal it usually saves you nothing, and it pushes the effective cost up. Read the clause rather than assuming either way, because this is one of the few terms that genuinely varies between providers.
Last, look at what each one does to your working capital. A loan takes a fixed sum out on a fixed date, which you can plan around. A sales-linked advance takes a share of every transaction, so it tightens hardest in your busiest weeks and loosens off in the quiet ones. For a seasonal business that is often the deciding factor, and it shows up in neither percentage.
Doing this properly means having both sets of paperwork in front of you at once, which is harder when every quote comes from a separate application. Tide Funding Options compares offers from more than 80 lenders through one application, so you can put the totals side by side without chasing each lender separately.
How Working Capital Finance Is Priced
Working capital products express their cost in different ways, and APR is not the right yardstick for all of them. A fixed fee leaves the repayment period uncertain; revolving credit and overdrafts depend on the balance you carry; invoice finance splits the price across separate charges. We compared these pricing conventions so you can see which assumption needs checking before you accept the headline.
| Product | How it is normally priced | Example providers | What to compare on |
|---|---|---|---|
| Merchant cash advance | Factor rate or fixed fee | Liberis, 365 Finance | Total repayable, the percentage of takings deducted, and how long clearing it will realistically take |
| Working capital loan | Interest rate or APR | Funding Circle, iwoca | APR, total repayable, term and the monthly payment |
| Revolving credit facility | Interest on the drawn balance, plus facility fees | iwoca Flexi-Loan | Cost at the balance you will genuinely carry, not at the full limit |
| Business overdraft | Interest or EAR, plus arrangement and renewal fees | High-street and app banks | Cost on your expected average balance, plus the annual charges |
| Invoice finance | Discount charge plus a service fee | Bank and independent lenders | The two combined, at your real invoice volume and the percentage advanced to you |
| Revenue-based finance | Fixed fee or factor structure | YouLend, Liberis | Total cost, the share of revenue taken, and the expected repayment period |
Fixed-fee and rate-based pricing leave you with different unknowns. With a fixed fee, the cost depends on how quickly you repay; with a rate, it depends on the balance you carry. Both need modelling, but the fixed fee has an extra disadvantage: it can look cheap until repayment timing is included.
When APR Rules Apply to UK Business Finance
Some UK business borrowing must show an APR and some need not. Which side of the line yours falls on depends on who is borrowing, how much, and what the agreement actually is. We took the position below from the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 itself rather than from a secondary summary.
Limited Companies and LLPs
A credit agreement is regulated only where the borrower is an individual or a “relevant recipient of credit” (article 60B). Article 60L defines that second term, and it reaches partnerships of two or three people who are not all companies, plus certain unincorporated bodies. A limited company is neither, and nor is an LLP. Borrow through one and the agreement sits outside the consumer credit regime altogether, with no APR required however small the sum.
Most lenders quote one on term loans anyway, because it is what business owners expect and because it makes their pricing comparable with everyone else’s. We rate that a courtesy rather than a guarantee, so check whether the figure you have been given covers the arrangement fee.
Sole Traders and Small Partnerships
Here it flips. A sole trader is an individual, and a partnership of two or three people, provided they are not all companies, is a relevant recipient of credit. Business borrowing by either can be a regulated credit agreement, carrying the APR disclosure that goes with it.
From there the size of the loan decides it. Article 60C(3) exempts an agreement where the credit exceeds £25,000 and is taken wholly or predominantly for the borrower’s business. Below that line, business credit to a sole trader or a small partnership is generally regulated. A £15,000 advance to a sole trader therefore sits in a different regime from a £40,000 one to the same person, and only the first carries an APR as of right. If you trade as a sole trader and you are borrowing modest sums, that is worth knowing before you accept a quote with no APR on it.
Merchant Cash Advances and Receivables Finance
An MCA is usually written as a purchase of future receivables rather than a loan. On that structure it is not credit at all, so the consumer credit rules and the APR disclosure that comes with them do not reach it. That is the ordinary position, and it explains why you will rarely see an APR quoted on an advance.
It is not a rule you can lean on in the abstract, though. The legal treatment follows what the agreement does, not the label on the marketing, and the borrower’s status matters as well. We recommend reading what the document says the provider is actually buying, and treating “unregulated” as a description of a typical structure rather than a settled fact about your own deal.
Factor Rate vs APR: Which Is Better?
Neither measure is better: they are two readings of the same offer, and you need both before you can judge it. The useful question is which kind of product suits you, and when we weighed the two against each other they split on cost, certainty, cash-flow flexibility, speed, eligibility and early repayment.
Cost. Over a short repayment period, factor-rate finance is usually the dearer of the two by a wide margin, and the three-month row in our worked example shows how wide that margin can get.
Repayment certainty. The factor rate wins this one without qualification. You know the exact cash figure on day one and nothing can move it.
Cash-flow flexibility. A sales-linked advance flexes with your takings, so a bad month costs you less that month. A loan payment lands whatever the weather, which is easier to plan for and harder to survive in a slow quarter.
Speed. Factor-rate providers underwrite on card takings and often fund within a few days. An APR-priced term loan takes longer and asks for more.
Eligibility. If your filed accounts are thin or your credit file is marked, the advance may be the only offer you get. We rate that a real advantage rather than a consolation prize, and the pricing reflects it.
Early repayment. The loan rewards it. The advance generally does not, and clearing it early makes the money you borrowed the most expensive it can be.
One judgement I will stand behind: if an APR-priced loan is genuinely open to you on a sensible term, take it. Factor-rate finance earns its place when the alternative is no funding at all, or when the cash has to land this week, and it deserves to be judged on that basis rather than on a percentage that flatters it.
Factor Rate vs APR FAQs
Is a factor rate the same as an APR?
No. A factor rate is a fixed multiplier that sets the total repayable and takes no account of time. An APR is an annualised measure that reflects when money is drawn and repaid, and includes the charges inside the total charge for credit. They measure cost in fundamentally different ways, so a factor rate of 1.25 cannot be read as 25% APR.
How do I convert a factor rate into something I can compare with an APR?
Take the cost as (factor rate minus 1) times the advance, add any charge outside the factor rate, then work out the annualised cost using the dates you will actually repay rather than the term alone. Scaling the fee up to a year without accounting for repayment timing gives you a simple annualised fee, which comes to less than half the true economic cost, and barely a third of it on a three-month advance.
Why is the effective cost so much higher than the factor rate suggests?
Because the fee is fixed while your use of the money is not. You start repaying almost immediately, so the average balance you have the use of is well below the amount advanced, and you still pay the whole fee. On our modelling of a £20,000 advance at 1.25 repaid in equal monthly instalments, the estimated effective annualised cost is 53.1% over twelve months and 291.5% over three.
Do merchant cash advances have to show an APR?
Usually not. An MCA is normally structured as a purchase of future receivables rather than a loan, so it falls outside the consumer credit rules that require APR disclosure. The position depends on what the agreement actually does and on who is borrowing, rather than on how the product is marketed, so read the document rather than relying on the category.
Does repaying a factor-rate advance early save me money?
On most agreements, no. The fee is fixed at the outset, so clearing the advance early means paying the same cash for less time, which raises the effective cost rather than lowering it. A minority of providers rebate part of the fee on early settlement, so check the settlement clause before you decide to clear it ahead of schedule.
How we compared factor rates and APR
Scope. We set out how a factor rate and an APR measure cost differently, how to put a factor-rate offer on the same footing as an APR-priced loan, and how the pricing conventions vary across the working-capital market. We do not rank providers here. This page supplies the method used to read provider pricing elsewhere on the site.
How we calculated the figures. The effective annualised costs in the worked example are our own modelling, not quoted rates. We solved for the periodic rate that equates the £20,000 advanced with the present value of the repayments, then annualised it. The assumptions are: the full advance drawn at the outset, equal instalments at each period end, and no charge outside the agreed fee. Change any of those and the figure moves, which is exactly why we label it an estimate rather than an APR.
Sources. The APR methodology is taken from the FCA Handbook, CONC App 1.2 (total charge for credit rules). The regulatory perimeter is taken from the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001: article 60B for what makes a credit agreement regulated, article 60L for the definition of a relevant recipient of credit, and article 60C(3) for the business-purpose exemption above £25,000. Provider documentation is used only for how each provider’s own product works.
Correction. Until August 2026 this page presented simple annualisations of a fixed fee as an “approximate APR” of 25%, 50% and 100%, and stated that an APR falls as the balance is repaid. Both were wrong, and the first understated the cost of factor-rate finance. We have replaced the terminology throughout and added the modelled effective figures alongside it.
Update cadence and disclosure. We re-verify the regulatory references and the worked figures regularly, and the verification date reflects the most recent review. This page is editorial content, not regulated financial advice. Some links on this page are affiliate links. See our editorial policy.