Factor rate

Definition

A factor rate is a fixed decimal multiplier used to express the cost of certain short-term finance, most commonly a merchant cash advance. Rather than charging interest on a reducing balance, the lender multiplies the amount advanced by the factor rate to fix the total repayable up front. Borrow £20,000 at a factor rate of 1.3 and you repay £26,000 in total, regardless of how quickly you clear it. The rate usually sits somewhere between 1.1 and 1.5.

In plain terms

A factor rate is a flat price tag, not a running meter. With a normal loan, interest accrues on what you still owe, so repaying early saves you money. With a factor rate, the cost is baked in from day one: £26,000 is owed whether you take six months or sixteen to repay it. That makes the headline number look reassuringly small — “just 1.3” — but it hides the fact that the equivalent annualised cost can be far higher than it appears, especially when repayment is quick.

Why it isn't an interest rate

The crucial difference is that a factor rate ignores time, and APR does not. Because a factor rate does not reduce as you repay, paying off a 1.3 advance in three months costs exactly the same £6,000 as paying it off in twelve — but in annualised terms, the three-month version is enormously more expensive. A 1.3 factor rate over a short term can translate into an APR well into the triple digits. This is why a factor rate cannot be compared like-for-like with the interest rate on a term loan: they measure cost in fundamentally different ways.

Cost is fixed up front, not accrued over time
Early repayment usually saves nothing
The low headline figure masks a high effective cost

Comparing the true cost

To compare a factor-rate product against an interest-bearing loan, convert it to a common measure. Take the total repayable, work out the pounds-and-pence cost, and express it against the term to get a like-for-like annualised figure. A facility priced at a clear interest rate — such as a Credicorp business loan, where you only pay for the time you borrow — is often far cheaper than a factor-rate advance once the maths is done, particularly if you can repay early. Run both through the true cost of borrowing calculator before you sign.

Frequently asked questions

Is a 1.2 factor rate the same as 20% interest?

No. A 1.2 factor rate means you repay 20% more than you borrow in total, however long it takes. Interest of 20% per year accrues on the reducing balance over time. Over a short term, a 1.2 factor rate is far more expensive than 20% APR.

Does repaying early reduce the cost?

Usually not. Because the total is fixed by the factor rate at the outset, clearing the advance early generally saves you nothing — unlike an interest-bearing loan, where early repayment cuts the interest you pay.

Why do lenders quote factor rates?

Because the number looks small and simple. “1.3” sounds gentler than the equivalent APR, which can run into the hundreds of percent on a short term. Always convert it to an annualised cost before comparing.