Factor Rate
The pricing mechanism used for merchant cash advances, expressed as a multiplier applied to the amount advanced to determine total repayment.
A factor rate is the pricing mechanism used in merchant cash advances (MCAs) and some revenue-based finance products. Unlike APR, which is an annual interest rate, a factor rate is a simple multiplier. If you borrow £10,000 at a factor rate of 1.3, you repay £13,000 in total - regardless of how quickly or slowly the repayment is made.
UK MCA factor rates typically range from 1.1 (lowest risk, high card volumes) to 1.5 (higher risk or shorter trading history). The factor rate includes all costs - there is no separate interest charge. Repayment is made as a percentage of daily card sales (the retrieval rate), so the effective speed of repayment varies with revenue.
Because factor rates are not APRs, direct comparison with business loans is not straightforward. The faster an MCA is repaid, the higher the equivalent APR; the slower the repayment, the lower the effective APR. Always compare the total repayment cost (advance amount x factor rate) and the effective repayment timeline when evaluating an MCA against a loan.
Example
A business advances £20,000 at a factor rate of 1.25. Total repayment is £25,000 (£20,000 x 1.25). With a 15% retrieval rate on £50,000 monthly card sales, approximately £7,500 per month is collected, giving a repayment period of approximately 3.3 months.
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