What is a factor rate, and why does it look so cheap?
Sterling's answer A factor rate is the number you multiply the advance by to get what you pay back: £10,000 at 1.35 means £13,500. It looks like 35%, but over six months of daily payments it works out at about 126% APR.
Want a straight answer for your business?
See who'll fund meA factor rate is the fixed multiple you pay back on a merchant cash advance. Take the advance, multiply by the factor rate, and that is the total you owe: £10,000 at 1.35 means £13,500 back, so the cost is £3,500. It is not an interest rate, and treating it like one is the most expensive mistake owners make with this kind of money.
How a factor rate works in pounds
The maths is one line. Advance × factor rate = total repayable. Total repayable − advance = cost.
| Advance | Factor rate | Total repayable | Cost |
|---|---|---|---|
| £10,000 | 1.35 | £13,500 | £3,500 |
| £50,000 | 1.35 | £67,500 | £17,500 |
| £100,000 | 1.35 | £135,000 | £35,000 |
The cost is fixed on the day you sign. It does not shrink as you repay, because there is no balance for interest to run on.
Why 1.35 is not 35%
The trap is reading 1.35 as "35% interest". Interest on a bank loan is quoted per year, on the money you still owe. A cash advance asks for the full £3,500 back over the term, and you start repaying from the first week, so you only have the whole £10,000 for a few days.
Over 6 months of daily payments (126 payments of £107.14), that £3,500 works out at about 126% APR. Paid weekly over the same 6 months it is about 123%. Stretch the same 1.35 over 12 months of daily payments and it falls to about 63%. Squeeze it into 3 months and it is about 250%.
Same factor rate, four very different prices. The term matters as much as the multiple.
What changes the real cost
- Term. Shorter term, higher APR, for the same factor rate.
- Fees. An arrangement fee taken from the advance means you receive less but still repay the full multiple.
- Repayment rhythm. Daily payments start pulling cash back sooner than weekly ones, which nudges the APR up slightly.
- Early settlement. On most advances the total is fixed. Paying early rarely saves money unless the contract says it does. See can I repay an advance early.
Sterling's take: never compare a factor rate with a loan rate. Convert it first.
What to do next
- Write down three numbers from the offer: the cash you will actually receive, the total repayable, and the term.
- Put them in the MCA APR calculator to see the annual cost.
- If you have a loan or revolving credit quote too, compare the APRs side by side with the offer checker.
- If the APR is over 100%, ask whether a longer term or a different product, such as a business loan, would do the same job for less.
Run your own numbers: Factor rate to APR converter
Estimated APR
125.9%
Very expensive.
- You receive
- £50,000
- You pay back
- £67,500
- Cost of the money
- £17,500
- Cost per £1 received
- £0.35
- 126 daily payments of
- £535.71
- Effective annual rate
- 251.1%
An estimate on the money you actually receive, with daily payments counted as 21 business days a month. Not an offer and not a lender's disclosure.
Ready for a straight answer?
Two minutes of questions. One funding specialist. No impact on your credit score.
Questions owners ask
Is a factor rate the same as an interest rate?
No. A factor rate is a fixed multiple of the advance, set on day one. An interest rate is charged on the balance over time, so the two numbers are not comparable until you convert the factor rate to an APR.
Does the cost go down if I repay faster?
Usually not. The total repayable is fixed when you sign, so finishing sooner often costs the same in pounds and more in APR terms. Ask the funder in writing whether any early settlement discount applies.
Is a lower factor rate always cheaper?
Only if the term is the same. A 1.20 factor over 3 months costs far more per year than a 1.30 factor over 12 months, because you hand the money back much faster.
Do fees sit on top of the factor rate?
They can. Some offers add an arrangement or admin fee taken from the advance, which means you receive less but repay the same. Always work from the cash that actually lands in your account.