Factor Rate
A pricing mechanism used by merchant cash advance providers, expressing the total repayment as a multiple of the amount advanced.
A factor rate is the pricing mechanism used by merchant cash advance (MCA) providers instead of an APR. A factor rate of 1.3 means that for every £1 advanced, you repay £1.30. The total repayment is fixed regardless of how long it takes to repay - unlike a loan where repaying early reduces the total interest paid.
Factor rates can obscure the true cost of borrowing. A factor rate of 1.3 repaid over 9 months is approximately equivalent to 40-50% APR. Over 6 months, the effective APR would be even higher. Always convert a factor rate to an APR equivalent before comparing it to other forms of business finance.
Unlike regulated business loans (which must disclose APR), merchant cash advances are not currently subject to the same FCA disclosure requirements in all cases. This makes it important to ask MCA providers for the APR equivalent and total amount repayable before agreeing to any facility.
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