Quick answer
A factor rate is a multiplier, such as 1.2 or 1.35, applied once to the amount advanced to set the total you repay. Advance $40k at 1.25 and you repay $50k, so the cost is $10k. Unlike interest, it doesn't shrink as you repay and ignores how long you hold the money, so quote the term and total dollars before comparing offers.
Key points
- Multiply the amount advanced by the factor to get the total repayable; subtract the advance to get the cost in dollars
- The cost is fixed from day one, so repaying faster rarely saves money unless the contract says so
- The same factor is far more expensive on a short repayment period than a long one, because the money is outstanding for less time
- Check whether fees come out of the advance, which lowers the cash you receive without changing the amount you repay
- Ask for the payout figure at month three, six and nine in writing before you sign
An offer arrives by email. The amount is $40k, the factor is 1.25, and the repayments are a modest-looking figure taken each business day. There is no interest rate anywhere on the page. If that’s the first time you’ve seen a factor rate, the sensible reaction is to ask what the number actually means for your bank balance.
Here is the short version, then the detail that matters.
How does a factor rate work?
A factor rate is a multiplier set once, at the start. You multiply the amount advanced by the factor, and the result is the total you repay.
| Step | Example |
|---|---|
| Amount advanced | $40,000 |
| Factor rate | 1.25 |
| Total to repay ($40,000 × 1.25) | $50,000 |
| Cost of the advance | $10,000 |
That’s the whole calculation. The lender then divides the total into repayments, commonly daily or weekly, or takes a fixed share of card takings until it’s cleared. The $10k does not change if you pay faster, and it doesn’t change if you pay slower within the agreed term. That predictability is the product’s selling point: you know the dollar cost on day one.
It’s also its weakness, as the next section shows. If you want the quick glossary definition, see factor rate; the rest of this guide is about reading one critically.
Why does the term change the real cost?
Because a factor rate ignores time, two offers with the same factor can be wildly different deals. Hold the same $40k advance and the same 1.25, and change only how quickly you repay.
| Repaid over 20 weeks | Repaid over 52 weeks | |
|---|---|---|
| Total repayable | $50,000 | $50,000 |
| Cost | $10,000 | $10,000 |
| Repayment (weekly) | $2,500 | $961 |
| Average money outstanding | roughly $20,000 | roughly $20,000 |
| Weeks the money is outstanding | 20 | 52 |
The cost is the same $10k, but in the first case you borrowed money for 20 weeks and in the second for 52. The 20-week deal costs about 2.6 times as much for each week you hold the money (52 divided by 20). The factor didn’t change; the time did.
That is the single insight to take away: a factor rate only means something alongside the repayment period. Always ask “over how long?” and set it against what the money earns you. If $40k of stock turns over in six weeks at a healthy margin, a short, expensive advance can make sense. If you need it for a slow-payback fit-out, the same offer eats the benefit. Our guide on the trade-offs of fast business loans covers when speed is worth paying for.
What gets deducted before the money reaches you?
Some advances take an origination fee, a broker commission or a documentation fee out of the advance. The factor is still applied to the amount advanced, but you receive less cash.
Suppose that $40k advance carries $1,200 in fees deducted at funding. You receive $38,800 and repay $50,000. Your real cost is $11,200, not $10,000. Ask the lender for two figures: “total repayable” and “amount deposited in my account.” The difference is your true cost. Our article on how fees change the cost of a loan shows why this matters on any loan.
How are the repayments taken?
Two structures are common, and they feel different in the business.
- Fixed repayments. A set amount each business day or week, taken by direct debit. It’s simple to budget but unforgiving in a quiet week, because the amount doesn’t flex. A failed debit may trigger fees, and persistent failures can put you in default.
- A share of takings. A fixed percentage of card sales is routed to the lender until the total is paid. It flexes with sales, so a slow week costs less, but the total repayable is still fixed, which means a slow period stretches the term rather than cutting the cost.
The first works better for steady cash flow, the second for lumpy takings. Our guide to daily, weekly and monthly repayments explains how to test the schedule against your actual cash flow. Product pages for merchant cash advances and short-term business loans set out the wider picture.
Can you pay a factor rate advance off early?
Check before you sign. Because the total repayable is fixed, many contracts give little or no reduction for early payout. Some offer a discount that rises the earlier you repay, and a few allow a partial refund of the unearned portion. The only reliable answer is the contract.
Ask for the payout figure on specific dates, for example at the end of month three, six and nine, and ask what happens to any fees already paid. If the lender won’t put those figures in writing, treat that as information. Our article on early repayment savings and penalties compares how different structures behave.
How does a factor rate compare with an interest-based loan?
A reducing balance loan charges interest on what you still owe, so paying early saves the interest you haven’t yet incurred. A factor rate product usually doesn’t. The two aren’t directly comparable by looking at the multiplier; compare them in dollars over the same period. See simple vs compound interest for business for why a flat sum can be more expensive than compounding on a quick payback, and the head-to-head page on merchant cash advances vs business loans.
Banks and many non-bank lenders offer interest-based term loans at lower dollar cost than a factor rate advance for borrowers who qualify. A bank offer that fits you is worth taking seriously. A factor rate product tends to fit when you need speed, can’t meet bank criteria or need to avoid property security.
Five questions to ask in writing
- What is the amount deposited into my account after all deductions?
- What is the total I will repay, and over what period?
- How are repayments taken, and what happens if one fails?
- What is the payout figure at month three, six and nine?
- Is any security, such as a general security agreement or personal guarantee, required?
The factor rate calculator turns the first two answers into a cost per week. If you’re already carrying a cash advance that is draining your takings, our page on refinancing expensive short-term business debt sets out what can be done.
If you’d like help sizing a better structure, tell us what you need and we’ll take it from there.
Checking whether a better structure exists
If you’re looking at a factor rate offer, or paying one off, the question worth asking is whether a reducing-balance loan could do the same job at a lower dollar cost. For some businesses it can, for others it can’t, and the only way to know is to look at the numbers.
Enquiring takes around a minute and doesn’t involve a credit check, so asking won’t leave a mark on your file. We don’t circulate your details to a crowd of lenders; a real person reads your enquiry, thinks about what suits your situation and phones you. Please fill the form in accurately, including any advance you’re currently repaying, so the first option we suggest is one that fits.
Frequently asked questions
What is a factor rate in simple terms?
It's a multiplier. The lender multiplies the amount advanced by the factor, say 1.3, and that gives the total you repay. Advance $30k at 1.3 and you repay $39k. The $9k difference is the cost, and it was set on day one.
Is a factor rate the same as an interest rate?
No. An interest rate is applied over time to a balance that falls as you repay. A factor rate is applied once to the original advance, so it doesn't reflect how long the money is outstanding. Two offers with the same factor can differ enormously in real cost depending on the repayment period.
How do I work out the cost of a factor rate loan?
Multiply the advance by the factor for total repayable, then subtract the cash you actually receive after any fees. Divide by the weeks or months of repayments to see the cost per period. The factor rate calculator on this site does the sum.
Can I save money by paying a factor rate advance off early?
Often not. Because the total repayable is fixed up front, repaying early usually means paying most or all of it anyway. Some contracts offer a discount for early payout, so ask for that in writing and look at the figure for several dates.
Which products use factor rates?
Merchant cash advances and some short-term, unsecured and invoice-based products. Banks and most term lenders use interest instead. If an offer quotes a factor, it's a signal to check the term and exit terms closely.
Are factor rate contracts covered by any protections?
Standard form contracts for financial products with small businesses are covered by the unfair contract terms law where the upfront price is $5m or less. That deals with unfair terms rather than the price itself, so the careful reading is still on you.