Merchant cash advance factor rates: what they mean and how to work out the cost

A merchant cash advance factor rate is a decimal multiplier that sets the total amount you repay. Multiply the advance by the factor rate and you have the fixed sum the provider will collect from a share of your future card takings.

Factor rates are usually written as a number such as 1.2 or 1.35. The figure before the decimal point represents the money you receive, and the figure after it represents the provider's charge. So a factor rate of 1.2 means you repay the advance plus an extra 20p for every pound received.

The British Business Bank describes the factor rate as a way of expressing the cost of business financing in decimal form, and notes that merchant cash advance contracts can be hard to follow because of the factor rate and sales-based repayments. That is the gap this guide aims to fill. For an overview of the product itself, see our merchant cash advance page.

The key difference is time. Interest is charged on the outstanding balance for as long as it is outstanding, so borrowing for longer costs more. A factor rate is applied once, at the start, and the total repayable does not change however long collection takes.

This has some practical consequences that are easy to miss:

• The cost in pounds is certain. You know from day one exactly how much you will repay in total, which some directors find reassuring.
• The repayment period is uncertain. Collections follow card sales through a holdback (also called a split), so a busy month repays more and a quiet month repays less.
• The cost does not fall as the balance falls. With an amortising loan, interest is charged on a reducing balance. With a factor rate, the charge was fixed upfront on the full advance.
• Early settlement rarely saves money. As the British Business Bank points out, fees are fixed, so repaying early does not usually reduce the total.

To turn a factor rate into a cost, subtract one from the factor rate and multiply by the advance. That gives the provider's charge in pounds. Then estimate how long collection will take, because the same charge means something very different over four months than over fourteen.

Work through these steps for any offer:

1. Find the total repayable. Advance multiplied by the factor rate.
2. Find the cost in pounds. Total repayable minus the advance.
3. Add any other charges. Check the agreement for arrangement, set-up or administration fees that sit outside the factor rate.
4. Estimate the monthly collection. Your typical monthly card takings multiplied by the holdback percentage.
5. Estimate the repayment period. Total repayable divided by the estimated monthly collection.
6. Test a quieter scenario. Repeat step 5 using lower takings, so you know how long repayment might take in a slow spell.

Our merchant cash advance calculator can help you run these numbers with your own figures.

An APR assumes a known schedule of repayments over a known term. A merchant cash advance has neither, so any annual percentage is an estimate built on assumed takings. The comparison can mislead in both directions.

Fast repayment raises the annual cost

If your takings are strong and the advance is collected quickly, the fixed charge is spread over a short period, so the effective annual cost rises. Good trading makes the advance more expensive in annual terms, which surprises many directors.

Slow repayment lowers it, but brings other costs

If takings fall and collection slows, the effective annual cost falls. But a slow period is also when a business is under most pressure, and some agreements may include minimum collection terms or review triggers. Read those clauses carefully.

A fairer way to compare

Rather than forcing everything into an APR, compare offers on three things side by side: total cost in pounds, the realistic repayment period under normal and quiet trading, and the terms (guarantees, early settlement and what happens if takings drop). Then compare that picture with the total cost and term of an alternative. Our guide to merchant cash advance vs business loan walks through that comparison.

Providers set their own pricing, but factor rates are typically influenced by how predictable your card takings are and how much risk the provider sees in collecting the total.

• Stability of card takings: steady, consistent sales over several months usually support better terms than volatile ones.
• Trading history: each provider sets its own minimum trading period, and a longer record gives it more data.
• Sector: some sectors are seen as more seasonal or more exposed to sudden changes in footfall.
• Advance size relative to takings: a larger advance compared with monthly sales takes longer to collect.
• Existing advances or borrowing: other providers already collecting from the same takings may affect the offer.
• Credit history: providers run their own checks on the company and often on directors.

The British Business Bank notes merchant cash advances can be more costly than other funding options, and describes them as better suited to short-term needs than to long-term funding. That is worth keeping in mind when weighing a quick decision against cost.

Before signing, ask the provider (or your broker) for clear written answers to these questions. The answers often matter as much as the factor rate itself.

• What is the total repayable in pounds, and are there any fees outside the factor rate?
• What holdback percentage applies, and is collection by card split or by variable direct debit?
• Is there an estimated term, and what assumptions sit behind it?
• Is there any discount for early settlement, and how is it calculated?
• What happens if card takings fall sharply, or if the business changes card processor?
• Is a personal guarantee or performance guarantee required? Our guide to what a personal guarantee is explains what that can mean for directors.
• Can I take further funding while the advance is being collected?

For limited companies, LLPs and partnerships of four or more partners, a merchant cash advance is generally unregulated. It is usually structured as the purchase of future card receivables rather than a loan, and Consumer Credit Act protections generally do not apply to finance for these businesses.

In practice, that means the agreement itself sets out most of your rights and obligations. Read the terms carefully, ask questions about anything unclear and consider taking independent legal or accounting advice before signing.

A merchant cash advance can suit a business with strong, regular card takings that needs funds quickly and values repayments that flex with sales. It may be less suitable where most income arrives by bank transfer or invoice, or where a longer, cheaper repayment profile would ease pressure on cash.

• Short-term business loans have a fixed term and repayment schedule, so the cost is easier to compare on an annual basis.
• Revenue-based finance also flexes with income but is usually linked to total revenue rather than only card sales.
• Unsecured business loans may suit longer-term needs where a fixed monthly repayment is manageable.

Welcome Finance is a commercial finance broker, not a lender. We work with UK limited companies, LLPs and partnerships of four or more partners, and we can help you understand and compare offers from lenders on our panel.

You get a dedicated relationship manager, a real person available by phone, email and chat, from your first enquiry until the lender pays out. They can help you set out the total cost in pounds and the likely repayment period for each option, so you are comparing like with like.

We do not charge you a fee. We are paid a commission by the lender when your finance completes. You can ask how much we will receive, and commission can differ between lenders. Read more on how we are paid. Lenders make their own decisions and approval is never assured, but you can check your eligibility in about 60 seconds without affecting your credit score.