Factor rate
Factor rates are the standard way merchant cash advance (MCA) providers and some revenue-based finance lenders price short-term funding in the UK. Unlike an annual percentage rate, a factor rate does not compound and does not change with the speed of repayment. A £20,000 advance at a factor rate of 1.30 means a fixed repayment obligation of £26,000, regardless of whether the business clears it in six months or twelve.
Because factor rates are not APRs, they can look deceptively low on first glance. A 1.20 factor rate is not the same as 20 per cent APR — when you express the cost on an annualised basis it is usually materially higher, particularly when the advance is repaid quickly through a daily or weekly holdback against card sales. UK SME owners comparing an MCA against a term loan should always convert the factor rate into an indicative APR or total cost of capital for a like-for-like view.
Factor rates are set by the lender based on perceived risk: card-sales history, time trading, sector, average ticket size, and any prior advances. A retailer with two years of clean card-sales data and a strong average daily volume will often be quoted closer to 1.10–1.20, while a younger business or a higher-risk sector may see 1.35–1.50.
Worked example
How the numbers play out
A hospitality business takes a £30,000 MCA at a factor rate of 1.28. Total repayable: £30,000 x 1.28 = £38,400. The lender holds back 12 per cent of daily card receipts until £38,400 has been collected. If card sales average £1,500 a day, the holdback is roughly £180 a day and the advance clears in about 214 trading days.
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