The True Cost of a Merchant Cash Advance: Factor Rates Explained

The cost of a merchant cash advance is not expressed as an interest rate. It is expressed as a factor rate — a multiplier on the original advance. A factor rate of 1.3 on £50,000 means the business will repay £65,000 in total, regardless of how long that takes.

On the surface, this looks simpler than an interest rate. It is not. The factor rate gives you the total fee. It does not tell you the annualised cost, which is the only number that lets you compare an MCA against a business loan, a revolving credit facility, or any other form of UK business funding.

This guide walks through how factor rates work, how to convert a factor rate into an effective APR you can actually compare, and what questions to ask before signing an MCA agreement.

For a wider view of how merchant cash advances compare to other UK SME funding structures, see our pillar guide on our Merchant Cash Advance Guide.

What is a factor rate?

A factor rate is a decimal multiplier used to calculate the total amount a business will repay on a merchant cash advance.

The formula is simple:

Total repayment = Advance amount × Factor rate

A £40,000 advance at a factor rate of 1.25 means the business repays £50,000 in total. The £10,000 difference — the fee — is fixed at the point of agreement and does not change based on how long repayment takes.

Factor rates in the UK typically sit between 1.1 and 1.5. A factor rate of 1.1 is unusual and tends to be reserved for large, low-risk businesses. Most UK MCAs land between 1.2 and 1.4.

The key thing to understand: the factor rate is a fee, not an interest rate. Interest compounds over time. A factor rate does not. This is why a factor rate cannot be directly compared to the APR on a bank loan without doing some maths.

Factor rate vs interest rate

The difference is easiest to see with a direct comparison.

A bank loan: £50,000 at 8% APR, repaid over 12 months.Total interest paid: roughly £2,230.Total repayment: £52,230.The cost is 4.5% of the advance.

An MCA: £50,000 at a factor rate of 1.3, repaid over 12 months.Total repayment: £65,000.The cost is 30% of the advance — and an effective APR of roughly 50% when annualised.

The difference is substantial. And the bank loan example is not the cheapest option available; a revolving credit facility with interest charged only on what is drawn can work out cheaper still, particularly for businesses that do not need the full amount all at once.

The point is not that MCAs are always the wrong tool. In specific situations — businesses that cannot access cheaper capital, urgent one-off needs, or situations where speed genuinely matters — an MCA can be worth the premium. But the premium needs to be understood, not assumed away.

For a comparison of how revolving credit works against a term loan, see our guide on term loans vs revolving credit.

The hidden variable: repayment speed

Here is the part of MCA pricing that causes the most confusion.

The factor rate is fixed. The total repayment is fixed. What is not fixed is how long it takes to repay — and that variable is what determines the true annualised cost.

Repayment happens through a daily (or sometimes weekly) deduction from card sales, usually a holdback percentage of 5% to 20%. The faster your sales, the faster the MCA clears. The slower your sales, the longer it drags on.

This has a counter-intuitive effect on cost:

• Repaid faster than expected → higher effective APR (same fee, less time)
• Repaid slower than expected → lower effective APR (same fee, more time)

Paying back quickly does not save you money on a merchant cash advance. It makes the annualised cost worse. This is the opposite of how almost every other form of business funding behaves.

Providers will usually give you an "expected repayment window" based on your historical card sales. Pay close attention to it. That window is the single biggest factor in what the MCA will actually cost you in APR terms.

How to calculate the effective APR

To compare an MCA against any other form of funding, you need to convert the factor rate into an annualised rate. The calculation takes three inputs:

1. The advance amount
2. The factor rate
3. The expected repayment window (in months)

The rough formula most brokers use in the UK is:

Effective APR ≈ ((Factor rate − 1) / Repayment months) × 12 × 100

This is a simplification — it does not account for the fact that repayments happen continuously rather than at the end of the term — but it is the right order of magnitude and is close enough for comparison purposes. The true APR (calculated using the MCA's actual daily repayment pattern) tends to be slightly higher still.

A quick example

An advance of £30,000 at a factor rate of 1.3, expected to repay in 10 months:

• (1.3 − 1) / 10 = 0.03
• 0.03 × 12 = 0.36
• Effective APR ≈ 36%

And that is on the lower end. Most MCAs land between 40% and 80% effective APR when calculated this way. Shorter repayment windows push the number higher.

Three worked examples

Here are three scenarios showing how the effective cost changes with the repayment window. Each uses the same advance and factor rate.

Scenario: £50,000 advance, factor rate 1.3, holdback 12% of card sales.Total repayment: £65,000 (fee of £15,000).

Scenario A: Strong card sales

Average daily card revenue: £3,000. Daily deduction: £360.Repayment clears in roughly 6 months.Effective APR: ((1.3 − 1) / 6) × 12 × 100 ≈ 60%

This is the scenario providers tend to showcase in sales materials — fast repayment, "short" facility. The APR is the highest of the three.

Scenario B: Moderate card sales

Average daily card revenue: £1,800. Daily deduction: £216.Repayment clears in roughly 10 months.Effective APR: ((1.3 − 1) / 10) × 12 × 100 ≈ 36%

This is a typical outcome for a mid-sized UK SME with consistent card sales.

Scenario C: Slower card sales or seasonal dip

Average daily card revenue: £1,000. Daily deduction: £120.Repayment clears in roughly 18 months.Effective APR: ((1.3 − 1) / 18) × 12 × 100 ≈ 20%

The APR looks better — but cash flow pressure is sustained for a year and a half. And if the business hits a genuinely slow period, repayment can drag on further, consuming card revenue for longer than the business can comfortably absorb.

The takeaway

The same advance produces wildly different effective APRs depending on how quickly the business pays it back. "What's the factor rate?" is not enough. The right question is: "What's the expected repayment window, and what APR does that translate to?"

Fees that go beyond the factor rate

The factor rate is the headline cost, but it is often not the only cost.

Origination or underwriting fees. Some providers charge 1% to 5% of the advance as an upfront fee, deducted before funds land in the business account. This raises the effective cost further without changing the factor rate.

Administration fees. Monthly or weekly admin fees are less common but do appear. These can add several hundred pounds a year to the total cost.

ACH / Direct Debit fees. If the holdback is collected via Direct Debit rather than card-splitting, there can be per-transaction fees.

Early repayment penalties. Counter-intuitively, some MCAs charge extra for early repayment — because the provider wants the full factor rate applied over the expected window. Others offer a discount for early settlement. The contract will tell you which.

Re-advance fees. If you take a second advance before the first is repaid, there are usually fees for rolling the outstanding balance into the new facility. This is where costs can compound quickly — the pattern known as stacking.

Always ask for an itemised breakdown of all fees before signing. A responsible provider will give you one.

Questions to ask before signing

A reputable MCA provider should be able to answer all of these clearly.

What is the total repayment amount? The factor rate multiplied by the advance.

What is the expected repayment window? In months, based on your recent card sales data.

What is the effective APR on that window? If they cannot or will not calculate this, you can do it yourself using the formula above — but the fact that they will not is informative.

What is the holdback percentage? And is it fixed, or can it change?

What happens on a slow sales day? Is there a minimum daily repayment?

Are there any fees beyond the factor rate? Origination, admin, Direct Debit, early repayment — get them in writing.

What are the terms on re-advances? If you need more capital while the first is outstanding, what does that cost?

Is the provider FCA-regulated? Many MCA providers in the UK are not. This is legal but limits your recourse if something goes wrong.

Is a personal guarantee required? Most MCAs require one. Understand exactly what you are personally liable for.

Frequently asked questions

What is a factor rate on a merchant cash advance?A factor rate is a decimal multiplier used to calculate the total repayment on an MCA. A factor rate of 1.3 on a £50,000 advance means the business will repay £65,000 in total. Unlike an interest rate, a factor rate does not compound over time — it is a fixed fee set at the point of agreement.

How do I convert a factor rate to APR?The rough formula is: ((Factor rate − 1) / Repayment months) × 12 × 100. For example, a factor rate of 1.3 repaid in 10 months works out to roughly 36% APR. The actual APR is usually slightly higher due to the continuous repayment pattern.

Does repaying a merchant cash advance early save money?Usually no. The factor rate is fixed, so the total repayment amount does not change. Some providers offer a discount for early settlement, but many do not. Paying back faster actually raises the effective APR, because the same fee is spread over less time.

Is a factor rate the same as an interest rate?No. An interest rate accrues over time and compounds. A factor rate is a one-off multiplier applied at the start. A 30% interest rate is not the same as a factor rate of 1.3 — they produce very different total repayments, especially over longer terms.

Why do MCA providers use factor rates instead of APR?Partly because MCAs are not technically loans in UK law — they are the purchase of future receivables — so APR disclosure requirements are different. Partly because factor rates make the product easier to sell: "pay back £65,000 on a £50,000 advance" sounds more intuitive than "this is roughly 50% APR."

Are factor rates regulated in the UK?Less tightly than loan interest rates. Because MCAs sit outside the Consumer Credit Act framework when provided to businesses, factor rate disclosure is not standardised in the way APR is for regulated loans.

What is a reasonable factor rate?It depends heavily on the business's risk profile and the repayment window, but UK factor rates typically sit between 1.1 and 1.5. Anything above 1.4 is expensive. Anything at 1.1 is unusual and usually reserved for larger, lower-risk advances.

The headline cost of a merchant cash advance is rarely the full story. The factor rate tells you the fee. The repayment window tells you the APR. And the APR is the only number that lets you compare an MCA against a bank loan, a revolving credit facility, or any other form of UK business funding on equal terms.

Before signing, do the conversion. Compare the number against at least one alternative. And if the APR makes the decision harder, not easier, that is the calculation doing its job.

For more guides on how to compare UK funding structures, visit our Merchant Cash Advance Guide here.

Related reading

• Merchant cash advance explained: how it works for UK businesses
• Revolving credit facility explained for UK SMEs
• Term loan vs revolving credit — which suits your business?
• Unsecured vs secured business loans
• What do lenders look at when assessing a revolving credit application?
• Juice Flex — the revolving credit facility that never expires

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