Factor rates explained: how merchant cash advance pricing works
By Helm, Business Funding Specialists
- A factor rate is a simple multiplier that determines the total cost of your advance
- Factor rates typically range from 1.15 to 1.5 for UK merchant cash advances
- Unlike interest, the cost does not compound over time
- You can calculate the total repayment by multiplying the advance amount by the factor rate
If you are comparing merchant cash advances, you will come across the term factor rate. It is the main pricing tool used by providers, and understanding how it works is essential for comparing deals and knowing exactly what your funding will cost.
Factor rates are different from interest rates, and mixing the two up can lead to confusion. This guide explains exactly how factor rates work in plain language.
What is a factor rate?
A factor rate is a decimal number that you multiply by your advance amount to calculate the total you will repay. For example, if you borrow £10,000 at a factor rate of 1.3, you will repay £13,000 in total. The difference of £3,000 is the cost of the advance.
Factor rates for UK merchant cash advances typically range from 1.15 to 1.5. The exact rate you are offered depends on factors like your card transaction volume, trading history, and the advance amount.
How to calculate total cost
The calculation is straightforward. Multiply the advance amount by the factor rate to get the total repayable amount. Subtract the advance amount to find the cost of funding.
| Advance amount | Factor rate | Total repayable | Cost of funding |
|---|---|---|---|
| £10,000 | 1.2 | £6,000 | £1,000 |
| £10,000 | 1.3 | £13,000 | £3,000 |
| £20,000 | 1.35 | £27,000 | £7,000 |
| £50,000 | 1.4 | £70,000 | £20,000 |
Factor rate vs interest rate
Factor rates and interest rates work very differently. An interest rate compounds over time, meaning the longer you take to repay, the more you pay. A factor rate is fixed from the start, so the total cost does not change regardless of how long repayment takes.
This is one of the key advantages of a merchant cash advance for businesses that want certainty. You know the total cost on day one, and it will not increase if repayment takes longer than expected due to a quiet trading period.
| Feature | Factor rate | Interest rate |
|---|---|---|
| Cost certainty | Fixed from day one | Changes over time |
| Compounding | No compounding | Compounds on outstanding balance |
| Impact of slow repayment | No extra cost | Higher total cost |
| Calculation | Advance x factor rate | Complex formula based on time |
| Transparency | Simple to understand | Can be confusing |
What affects the factor rate you are offered?
Several factors influence the factor rate a provider will offer you. Understanding these can help you get the best possible deal.
- Monthly card transaction volume: higher volumes typically attract lower rates
- Trading history: longer, more consistent histories reduce risk and lower rates
- Advance amount relative to revenue: borrowing less relative to your turnover usually means a better rate
- Business sector: some sectors are considered lower risk than others
- Previous borrowing history: returning customers with a good track record may qualify for improved rates
How to compare factor rates between providers
When comparing offers, always focus on the total repayable amount rather than the factor rate in isolation. Two providers might quote similar factor rates but differ in fees, repayment percentages, or other terms that affect the real cost.
Ask each provider for a clear breakdown showing the advance amount, factor rate, total repayable, and any additional fees. If a provider is reluctant to give you this information upfront, that is a warning sign.
Can the factor rate change?
No. Once you accept the offer and sign the agreement, the factor rate is locked in. The total amount you will repay does not change, regardless of how long it takes. This is a fundamental feature of the product and one of the reasons it appeals to businesses that value predictability.
Frequently asked questions
What is a good factor rate for a merchant cash advance?
In the UK, factor rates between 1.15 and 1.3 are considered competitive. The rate you are offered depends on your card revenue, trading history, and the advance amount.
Is a factor rate the same as an interest rate?
No. A factor rate is a fixed multiplier that determines the total cost upfront. An interest rate compounds over time, so the total cost changes depending on how long you take to repay.
Do I pay more if repayment takes longer?
No. The total cost is fixed by the factor rate at the outset. Whether you repay in six months or twelve months, the total amount stays the same.
Can I negotiate the factor rate?
Some providers are open to negotiation, particularly for businesses with strong card revenue and a good trading history. It is always worth asking whether a better rate is available.