The True Cost of a Merchant Cash Advance: Factor Rates Explained
If you're exploring a merchant cash advance (MCA) for your UK business, you need to understand the true cost before signing anything. The headline factor rate doesn't tell the full story, and the pricing structure is fundamentally different from a traditional loan.
This guide covers how MCA pricing works, what the actual cost looks like, how it compares to alternatives, and what to check before committing.
How Merchant Cash Advance Pricing Works
MCAs don't use an interest rate. They use a factor rate — a multiplier applied to the advance amount to calculate the total repayment.
Example:
- Advance: £50,000
- Factor rate: 1.35
- Total repayment: £50,000 × 1.35 = £67,500
- Cost of capital: £17,500
The factor rate is fixed at the outset. Unlike interest on a loan, it does not reduce as you repay — you owe the full £67,500 regardless of how quickly you repay it.
Why Early Repayment Doesn't Reduce Your Cost
This is the most counterintuitive aspect of MCA pricing. If you repay your £50,000 advance in 3 months instead of 12, you still owe the full £67,500. You save time, but not money.
On an annualised basis, this makes fast repayment significantly more expensive than it first appears. A factor rate of 1.35 repaid over 3 months represents a very high effective annual cost. Repaid over 12 months, the same factor rate represents a lower but still material cost of capital.
What Influences the Factor Rate
MCA providers set factor rates based on:
- Monthly card revenue volume (higher revenue typically means better rates)
- Trading history (longer established businesses may receive lower rates)
- Industry risk profile
- Current outstanding advances with other providers
There is no standardised pricing. Rates vary significantly between providers and between businesses, so comparison requires requesting terms directly from multiple lenders.
Additional Fees to Check
Beyond the factor rate, check for:
- Origination fees — charged upfront as a percentage of the advance
- Administration fees — monthly or flat charges for account management
- Prepayment terms — some providers offer a discount for early settlement; many do not
Always request a full schedule of fees and confirm the total repayment amount before signing.
Is the Provider FCA-Registered or Authorised?
MCAs are advanced against future revenue and are not classified as credit agreements under the Consumer Credit Act in all circumstances, which means not all MCA providers are required to be FCA-registered or authorised. For business lending, this distinction matters.
Before signing, confirm:
- Whether the provider is FCA-registered or authorised
- What protections apply if there is a dispute
- Whether the agreement is governed by UK law
How MCA Cost Compares to a Revolving Credit Facility
The structure of an MCA is fundamentally different from a revolving credit facility, which affects total cost.
MCA:
- Factor rate applied to full advance on day one
- Total repayment fixed regardless of repayment speed
- Cost does not reduce with faster repayment
- Repayment taken daily as a percentage of card revenue
Revolving credit facility:
- Interest accrues daily on the outstanding drawn balance only
- Repay early and your total cost reduces proportionally
- Draw again as needed without reapplying
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Illustrative comparison:
A business draws £50,000 and repays it over 90 days.
- Under an MCA at a 1.35 factor rate: total cost = £17,500, regardless of repayment speed
- Under a revolving credit facility: interest accrues on the drawn balance for 90 days, with total cost a function of the drawn amount and the rate over that period
For businesses that repay quickly and redraw frequently, a revolving credit facility often carries a lower total cost than an MCA.
This is an illustrative comparison. Actual costs depend on lender terms and individual circumstances.
When an MCA May Be the Right Tool
MCAs are most appropriate when:
- The business has high card revenue but limited credit history
- Speed is critical and the business cannot wait for a conventional application process
- The business needs capital but does not qualify for other products
Juice Flex: An Alternative to Consider
Juice Flex is a revolving credit facility for UK SMEs, from £50,000 to £1,000,000. Interest accrues on the drawn balance only. Repayments restore the available limit without reapplication.
For businesses currently using or considering an MCA, Juice Flex may offer a more cost-efficient structure for recurring working capital needs.
Subject to status and lending criteria.
What to Check Before Signing an MCA
- Total repayment amount (not just the factor rate)
- All fees including origination and administration charges
- Whether early settlement reduces total cost
- FCA registration or authorisation status of the provider
- Daily holdback percentage and how it affects your cash flow
- What happens if revenue drops significantly (minimum repayment periods or floors)
Key Takeaways
- MCA pricing uses a factor rate, not an interest rate — total repayment is fixed regardless of repayment speed
- Early repayment does not reduce your cost under most MCA structures
- Total cost of an MCA is often significantly higher than a revolving credit facility for the same capital amount and repayment period
- Revolving credit facilities charge interest on the drawn balance only, making them more cost-efficient for businesses that repay and redraw regularly