You’ll often be asked to choose between an offer quoted as a factor rate and one quoted as an APR, and the two don’t mean the same thing. Reading them as if they do is the most expensive mistake in working capital finance.
We rate the distinction worth getting right before you sign anything. A factor rate fixes a total cost; an APR describes a rate that bites on your balance over time, and the same deal can look cheap one way and dear the other.
The Core Difference
You repay a fixed total under a factor rate. Borrow £20,000 at 1.30 and you repay £26,000, full stop — the £6,000 cost doesn’t move whether you clear it in two months or twelve.
You should read an APR differently. It’s a standardised measure of borrowing cost, expressed as a percentage of the outstanding balance per year with fees included, and it falls as you pay the balance down.
Compare them directly and you’ll mislead yourself on what hits your cash flow. A factor rate states total cost as a fixed sum; an APR states the cost rate as it applies over time. That’s the trap.
| Feature | Factor rate | APR |
|---|---|---|
| Expressed as | Fixed multiplier (e.g. 1.30) | Annual percentage (e.g. 12%) |
| Includes time? | No | Yes |
| Includes fees? | Often not | Yes, mandatory fees |
| Early repayment | No change to cost | Reduces total cost |
| Used by | MCAs, revenue finance | Loans, overdrafts, cards |
Why the Difference Matters in Practice
You set two offers side by side on your desk on a Monday morning: one quotes a factor rate of 1.25, the other quotes 40% APR. The factor rate looks lighter at a glance, and it’s not.
You get a very different picture once you annualise. A factor rate of 1.25 on a six-month advance is equivalent to an approximate 50% APR; on a three-month advance it’s nearer 100%; over a full year, nearer 25%.
The factor rate stays 1.25 in all three cases; the APR swings from 25% to 100% with repayment speed. That’s how annualised rates work, and it’s why a factor rate alone can’t tell you if you’re beating that 40% offer.
| Factor rate 1.25 on £20,000 | Repayment period | Approximate APR |
|---|---|---|
| £25,000 total (£5,000 cost) | 12 months | ~25% |
| £25,000 total (£5,000 cost) | 6 months | ~50% |
| £25,000 total (£5,000 cost) | 3 months | ~100% |
How APR Is Calculated
You get a legal standard with APR, defined under the Consumer Credit Act 1974 and regulated by the FCA. It rolls the interest rate together with any mandatory fees and expresses the lot as one annual percentage.
Borrow £10,000 at 10% APR over 12 months and you pay £1,000 in interest on a flat calculation, and less on a declining balance because the APR accounts for the timing of your payments.
You should focus on that timing. When your bookkeeper runs the month-end numbers, a loan whose balance falls each month costs less than one where the full balance is outstanding all year, and the APR captures that. We rate it the fairest single number for comparing time-based credit.
Converting a Factor Rate to APR
You convert in two steps, and the result is only ever approximate. Take the cost as (factor rate minus 1) times the advance, then annualise it over the repayment period you realistically expect.
A factor-rate product has no single true APR, because the answer depends entirely on how fast you repay. When you clear the advance early in a strong December, by quarter-end the same factor rate has produced a far higher APR than a slow repayment would.
You should still do the conversion. An approximate APR over your likely repayment period is the only way to line a factor-rate offer up against an APR-priced loan, even if the figure carries a margin of error.
When Each Measure Is More Useful
You should lean on the factor rate when you want the fixed total cost up front. It tells you exactly what you’ll repay in pounds, which is genuinely useful for budgeting a known total against a known return.
You should lean on the APR when you are comparing options. Because it puts different repayment structures on the same footing, it’s the measure that tells you whether one deal is actually cheaper than another over time.
We rate the honest approach as using both: the factor rate for the cash total you’ll hand over, and the effective APR for whether that total is a good deal. One without the other leaves you half-informed.
Common Mistakes When Comparing Offers
You should never treat a factor rate like an interest rate. A factor rate of 1.30 is not a 30% rate; annualised over a typical repayment it’s far higher, and reading it as 30% understates your cost badly.
You should also stop assuming a lower factor rate always wins. Repayment speed and any fees outside the factor rate change the real cost and the drain on your cash flow, so a 1.25 cleared fast can cost more in APR terms than a 1.30 repaid slowly.
Convert before you compare a factor rate against a loan APR. Add any separate fees, then compare like with like. We find that one discipline saves businesses more than any amount of haggling.
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 ignores time; an APR is an annualised percentage of the outstanding balance that includes fees and reflects the repayment schedule. They measure cost in fundamentally different ways.
How do I compare a factor rate and an APR fairly?
Convert the factor rate to an approximate APR over your realistic repayment period: cost equals (factor rate minus 1) times the advance, annualised over that period. Then compare that figure against the loan’s APR, and add any fees outside the factor rate.
Why is the APR on a factor-rate product so high?
Because the fee is fixed regardless of time, so annualising it over a short repayment period produces a large percentage. A 1.25 factor rate cleared in three months is near 100% APR, even though the cash cost is the same as clearing it in a year.
Which measure should I rely on?
Use both. The factor rate tells you the exact cash total you’ll repay, which is useful for budgeting; the effective APR tells you whether that total is competitive against other credit. Relying on the factor rate alone is how borrowers overpay.
Why don’t merchant cash advances show an APR?
Merchant cash advances sit outside the Consumer Credit Act because repayment is contingent on future card revenue rather than a fixed debt, so there is no legal requirement to disclose an APR. The work of annualising the cost falls to you.
Methodology and Disclosure
How we compared factor rates and APR
Scope. We set out how factor rates and APR measure cost differently, how to convert between them, and when each helps, using provider documentation and our own primary-verified merchant cash advance and loan reviews.
Data sources. Factor-rate ranges and loan APRs were checked against provider pricing (Capify, Funding Circle, iwoca) and the Bank of England base rate (3.75% as of June 2026). The APR conversions are approximate illustrations assuming 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. APR disclosure is required for regulated consumer credit, not for commercial merchant cash advances. Compare offers directly with providers before you apply.