Factor Rate

How a factor rate works

If a business borrows £50,000 under a merchant cash advance with a factor rate of 1.30, the total amount repayable is £50,000 × 1.30 = £65,000, regardless of how long repayment takes. Unlike a traditional interest-bearing loan, the cost does not reduce if the advance is repaid early — the full £65,000 is owed from the outset. All figures are illustrative, not a quote.

Factor rate versus APR

Because the total cost is fixed rather than time-dependent, converting a factor rate into an equivalent APR requires knowing the repayment velocity. If the same £65,000 total repayment is made over six months, the implied APR is very different from the same total paid over 18 months. A factor rate of 1.30 repaid in six months converts to a materially higher APR than one repaid over two years. This makes direct comparison with conventional term loans difficult without modelling the expected repayment timeline.

Revenue-based repayment

Merchant cash advances and revenue-based facilities typically recover repayments as a fixed percentage of daily card receipts or invoiced revenue. During high-revenue periods, repayment accelerates; during slower periods, it slows. This flexibility can suit businesses with seasonal or variable income, but it also means the total duration — and therefore the implied cost — is uncertain at the outset.

Considerations for directors

Factor-rate products are not regulated under the Consumer Credit Act (Credicorp lends exclusively to limited companies), so disclosure requirements differ from consumer finance. Directors should request a clear statement of the total amount repayable, the retrieval percentage, and any additional fees before committing. Compare the total cost, not just the rate label, against alternative facilities such as invoice discounting or a revolving credit facility.