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A merchant cash advance factor rate is the fixed multiplier a lender applies to the amount you borrow to work out your total repayment, used instead of the interest rate you would see on a standard business loan. If you are offered a factor rate of 1.2 on a £10,000 advance, you repay £12,000 in total, whatever happens to your trading in between.
Factor rates are the single biggest driver of how much a merchant cash advance actually costs, but they are also one of the most misunderstood parts of the product. This guide breaks down how they work, what is typical in the UK, and how to compare a factor rate quote properly before you commit.
What is a factor rate on a merchant cash advance?
A factor rate is a fixed decimal figure, typically somewhere between 1.10 and 1.50, that a merchant cash advance provider multiplies by the amount you borrow to set the total you repay. It is agreed upfront and does not change once your advance is in place, regardless of how quickly or slowly you repay it. This makes a factor rate fundamentally different from an interest rate. Interest accrues over time, so a loan held for longer costs more in interest. A factor rate is a flat fee, fixed at the point you draw the advance, so the total amount you owe is set from day one.
How do you calculate the cost of a merchant cash advance from a factor rate?
To work out what a merchant cash advance will cost, multiply the amount you borrow by the factor rate to get your total repayment, then subtract the amount you borrowed to see the cost in pounds. The table below shows how this plays out across different advance amounts and factor rates.
Amount borrowed | Factor rate | Total repayment | Cost |
|---|---|---|---|
£20,000 | 1.10 | £22,000 | £2,000 |
£20,000 | 1.15 | £23,000 | £3,000 |
£20,000 | 1.20 | £24,000 | £4,000 |
£20,000 | 1.25 | £25,000 | £5,000 |
£20,000 | 1.30 | £26,000 | £6,000 |
£20,000 | 1.35 | £27,000 | £7,000 |
As the table shows, moving from a factor rate of 1.10 to 1.35 more than triples the cost of the same £20,000 advance, which is why even a small difference in factor rate is worth negotiating or shopping around for. You can use our merchant cash advance calculator to see how different factor rates can impact the cost.
What is a typical factor rate for a merchant cash advance in the UK?
Typical factor rates for a merchant cash advance in the UK sit between 1.10 and 1.35 across our lender panel, with the exact rate depending on how much risk a provider sees in your business. Some providers will go up to around 1.50 for higher risk applications.
Business risk profile | Typical factor rate range | Usually seen in |
|---|---|---|
Lower risk | 1.10 to 1.20 | Established businesses with long, consistent card sales history |
Medium risk | 1.20 to 1.30 | Businesses with shorter trading history or more seasonal revenue |
Higher risk | 1.30 to 1.50 | Newer businesses, inconsistent card sales, or existing advances outstanding |
What determines the factor rate you are offered?
A merchant cash advance provider sets your factor rate based on how confident they are that your card sales will repay the advance smoothly. The main factors are:
Working on a good business credit score before you apply can help you access the lower end of the factor rate range.
Factor rate vs holdback percentage: what is the difference?
A factor rate and a holdback percentage measure two different things, and mixing them up is one of the most common mistakes business owners make when comparing merchant cash advance offers. The factor rate sets your total cost, fixed from the day you draw the advance. The holdback percentage, sometimes called a retrieval rate, is the share of your daily card sales the provider takes to collect that repayment, usually somewhere between 10% and 25%.
In practice, the two work together but independently. A lower factor rate makes your advance cheaper overall. A lower holdback percentage leaves you with more cash day to day, but stretches out how long it takes to clear the advance. It is possible to have a low factor rate with a high holdback, or the other way round, so it is worth asking your provider for both figures rather than assuming one tells you the whole picture.
How does a factor rate compare to an interest rate or APR?
A factor rate is not directly comparable to an interest rate or APR because it does not account for how long you take to repay, so the same factor rate can represent a very different underlying cost depending on your repayment speed. To make a fair comparison, you need to annualise the cost. A rough way to do this is to divide the cost of the advance by the amount borrowed, then divide that by the repayment term in years. For example, a factor rate of 1.2 repaid over 6 months works out at roughly 40% on an annualised basis, but the same factor rate of 1.2 repaid over 3 months works out at roughly 80%, because the same fixed cost is being paid back twice as fast.
This is exactly why two merchant cash advances with an identical factor rate can cost very differently in annualised terms, and why the headline rate alone does not tell you enough. If you want to check a factor rate quote against a fixed term loan, our business loan calculator lets you enter an amount, term and interest rate and see the resulting factor rate. Testing different interest rate assumptions until the output matches the rate you have been quoted gives you a rough equivalent interest rate to compare against.
What is a good factor rate for a merchant cash advance?
A good factor rate for a merchant cash advance is generally one in the 1.10 to 1.20 range, though what counts as good also depends on how quickly you expect to repay it. A slightly higher factor rate can still work out reasonably priced if it comes with a longer, more comfortable repayment term, while a low factor rate repaid very quickly can still carry a high annualised cost.
Because merchant cash advances typically sit outside the Financial Conduct Authority's consumer credit rules, providers are not required to disclose cost in a standardised way. This makes comparing more than one offer, rather than judging a single quote in isolation, the most reliable way to tell whether a factor rate is competitive. With a Capitalise account, you can compare offers from our panel of 130+ lenders and receive support from one of our dedicated funding specialists, who will explain all terms and costs involved in any offers.
How can I get a better factor rate?
Here are some steps you can take to improve your chances of being offered a good factor rate:
If you compare a few quotes and the factor rates on offer all look higher than you expected, it is worth checking whether a business loan might price out more cheaply for your business, since they are priced on an interest rate rather than a factor rate. Our article on the pros and cons of a merchant cash advance covers this trade off in more depth.
Compare merchant cash advance factor rates with Capitalise
Getting more than one factor rate quote is the most reliable way to know whether the rate you have been offered is competitive. Apply for a merchant cash advance through Capitalise and you access a panel of 130+ UK business lenders, so you can compare factor rates and terms side by side before you commit.
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