Quick answer
A factor rate is a multiplier, such as 1.2 or 1.35, that sets the total repayable on a short-term business loan or merchant cash advance. Multiply the amount advanced by the factor: $50k at 1.3 means $65k back. The cost is fixed on the full amount from day one, so it doesn't fall as you repay, and the same factor costs far more per month over a shorter term.
Key points
- Total repayable = amount advanced x factor
- Charged on the original amount, not on a reducing balance
- A shorter term at the same factor means a higher cost per month
- Paying out early often saves little or nothing unless the contract says otherwise
Short-term lenders like factor rates because they’re tidy: one number, one multiplication, one total. Borrowers like them for the same reason. The trouble is that the tidiness hides the two things that really drive cost, which are how long you have the money and how quickly you hand it back.
How the maths works
Take the amount advanced and multiply it by the factor. The result is everything you’ll repay.
- $40k at a factor of 1.25 = $50k repayable, a $10k cost
- $40k at a factor of 1.35 = $54k repayable, a $14k cost
That total is then divided into daily or weekly repayments, usually collected automatically from your business bank account, or in the case of a merchant cash advance, taken as a slice of card takings.
One number, very different price tags
A factor says nothing about time. A 1.3 factor over 18 months and a 1.3 factor over six months both cost $15k on $50k, but you have use of the money for three times as long in the first case. Per month, the six-month version is three times the price.
There’s a second effect. Because repayments start almost immediately, you aren’t holding the full amount for the whole term. On a loan paid down evenly, your average balance is only about half the original advance, yet the cost was set on all of it. That’s why the Reserve Bank, in its 2018 review of small business finance, recorded owners’ concerns that annualised costs on fast online loans were often very high, and why it pays to turn any factor offer into dollars per month before comparing it with anything else.
Worked example: same factor, different terms
A Hobart café owner is offered $60k at a factor of 1.3 by two providers.
| Provider A | Provider B | |
|---|---|---|
| Total repayable | $78k | $78k |
| Cost of the advance | $18k | $18k |
| Term | 9 months | 18 months |
| Cost per month of use | $2,000 | $1,000 |
| Approx. weekly repayment | $2,000 | $1,000 |
The headline offers are identical. In practice, Provider B costs half as much per month and takes half as much out of the café’s account each week, which matters in the slow winter months. Plug your own offers into the factor rate calculator, and if you’d like help reading the fine print, get in touch with us.
Early payout and renewals
Because the cost is fixed at the start, paying off early often doesn’t reduce what you owe. A minority of contracts reduce the payback if you settle ahead of time; plenty keep it fixed. Check before you sign, especially if you expect a large payment that could clear the debt sooner.
Watch renewals, too. Being offered a top-up halfway through can feel like good news, but the new factor usually applies to the full new amount, including the part used to clear what’s left of the first advance. If you’ve ended up with more than one advance running at once, our page on paying out a merchant cash advance covers ways to consolidate.
Related terms: establishment fee, cash advance, unsecured loan and principal.
Holding a factor offer and unsure it’s the best deal?
Factor-priced finance has its place when speed matters and there’s no property to secure, but it’s worth knowing what else you’d qualify for first. A property owner, for example, may be able to borrow the same amount for far less with security. Tell us what you’ve been offered on our sixty-second form. Your credit score won’t be affected by asking, and your information isn’t passed around the industry. One of our team reviews it and calls you with an honest comparison. Enter the real amounts and term so we can measure the alternatives against the offer in your hand.
Frequently asked questions
Is a factor rate the same as an interest rate?
No. An interest rate is charged on the balance you still owe, so the cost shrinks as you repay. A factor rate fixes the total cost upfront on the full amount advanced. Two loans that look similar on paper can cost very different amounts once you work both out in dollars.
What does a factor rate of 1.4 mean?
For every dollar advanced you repay $1.40. On $30k, that's $42k in total, so the advance costs $12k. Whether that's reasonable depends on how long you have to repay it and what you're using the money for.
Do fees come on top of the factor rate?
Sometimes. Some providers build everything into the factor; others add an origination or establishment fee, or deduct it from the advance. Ask for the total repayable and the net amount you'll actually receive.
Can I save money by paying a factor rate loan off early?
Only if the contract offers an early payout discount. Many factor-priced products require the full payback amount whenever you settle. Some offer a reduction, so ask for the exact payout figure at different dates before signing.
Which lenders use factor rates in Australia?
They're most common on merchant cash advances, revenue-based products and some short-term unsecured loans from online lenders, usually for terms under 18 months. Banks and longer-term lenders generally price with interest rates instead.