Factor rates explained

What a factor rate is

A factor rate prices a loan as a simple multiple of the amount advanced, written as a decimal such as 1.2 or 1.4. Borrow £10,000 at a factor rate of 1.3 and you repay £13,000 — the £3,000 is the total cost of the finance, fixed the moment the agreement is signed. Factor rates are most common on merchant cash advances and some short-term unsecured products.

Crucially, a factor rate is not an interest rate. Interest accrues over time on a balance; a factor rate sets the whole cost up front as a lump sum. That makes the figure look small — 1.3 sounds gentle — but it can represent a very high annualised cost depending on how quickly you repay.

Why repaying early saves nothing

With an ordinary loan, clearing the balance early cuts the interest you pay, because interest stops accruing — see early repayment on business loans. A factor rate works the opposite way. The total repayable is fixed in pounds the day you borrow, so paying it off in three months rather than nine does not reduce the cost at all: you still owe the full multiple.

That changes the economics completely. Speeding up repayment on a factor-rate facility simply compresses the same fixed cost into a shorter period, which raises the effective annual rate rather than lowering your bill. This is the single most misunderstood feature of factor-rate borrowing, and the reason it can be far dearer than it first appears.

Translating it into an annual cost

To compare a factor rate against a normal APR, you have to bring time into the picture. A factor rate of 1.3 repaid over twelve months is roughly a 30% cost for the year — but the same 1.3 repaid over six months is closer to a 60% annualised cost, because you pay the same premium in half the time.

So two facilities with an identical factor rate can have wildly different true costs depending on the repayment period. Never judge a factor rate in isolation: always pair it with the term. The cleanest way to see the real number is to run the advance and its expected repayment window through the true cost of borrowing calculator.

When a factor-rate facility makes sense

Factor-rate products suit businesses that need cash fast and value certainty over the cheapest possible rate — you know the exact pounds repayable from day one, with no compounding surprises. For a card-led retail or hospitality business with steady takings, a merchant cash advance priced this way can be a practical fit; the trade-off is cost, not transparency.

If your need is a defined sum you can repay in instalments, a conventional business loan where interest falls as you repay is usually cheaper. Credicorp lends to the company with no personal guarantee; you can register to apply. This guide is educational and not financial advice.