The True Cost of Inventory Financing: Factor Rates, APR, and What to Compare
Part of the Inventory Funding guide | Updated: April 2026
Understand what factor rates actually mean, how to calculate the effective APR on inventory financing, and why repayment speed changes the real cost — so you can compare options accurately rather than being misled by headline numbers.
Why headline rates don’t tell the whole story
The cost of inventory financing is not always what it appears. Two products can have very different advertised rates but end up costing similar amounts in practice — or vice versa. The key is understanding how costs are structured, not just what percentage is quoted.
There are three main cost structures you will encounter:
- Interest rates — used by revolving credit facilities and term loans
- Factor rates — used by merchant cash advances
- No cost or early payment discount — used by supplier credit
Each works differently. Comparing them directly without understanding the mechanics leads to poor decisions.
Interest rates — what you pay on a revolving credit facility or term loan
Interest rates charge you a percentage of the outstanding balance over time. They are the most transparent cost structure.
How it works: If you draw £30,000 from a revolving credit facility at a monthly rate of 1.5%, you pay £450 in interest for each month the balance is outstanding. Repay in three weeks and you pay less. Repay in three months and you pay more.
The key advantage: you only pay for what you use, for as long as you use it. A revolving credit facility is particularly cost-effective when your inventory turns quickly — stock that sells in 30 days costs far less to finance than stock that sits for 90.
Annual Percentage Rate (APR): When comparing interest-bearing products, ask for the APR — the annualised cost including fees. This gives you a like-for-like comparison across different products and lenders.
→ See how Juice Flex is priced
Factor rates — the flat cost structure used by MCAs
A factor rate is used by merchant cash advances (MCAs) and some short-term lenders. It looks simple but works very differently from an interest rate.
How it works: A factor rate is a multiplier applied to the advance amount. If you receive £50,000 at a factor rate of 1.3, you repay £65,000 in total (£50,000 × 1.3). The £15,000 cost is fixed — it does not reduce if you repay early.
Why this matters: Because the cost is flat, repaying faster does not save you money. In fact, it makes the product more expensive on an annualised basis. A £50,000 advance at a 1.3 factor rate:
- Repaid in 3 months — effective APR of approximately 120%
- Repaid in 6 months — effective APR of approximately 60%
- Repaid in 12 months — effective APR of approximately 30%
The faster your sales, the higher the effective annualised cost.
How to convert a factor rate to an effective APR:
- Calculate total repayment: advance × factor rate
- Calculate total cost: total repayment − advance
- Divide total cost by advance to get the flat cost rate
- Annualise based on the expected repayment period
This is why a factor rate of 1.3 is not equivalent to 30% interest. Over a six-month repayment period, it is closer to 60% APR.
Why repayment speed changes the real cost
For interest-bearing products, faster repayment means lower total cost. For factor rate products, repayment speed affects the effective APR but not the total amount repaid.
This creates an important asymmetry for inventory businesses:
If your inventory sells quickly (30–45 days): a revolving credit facility becomes very cheap — you draw, sell, repay, and your total interest exposure is minimal. A factor rate product charges the same regardless of how fast you repay.
If your inventory moves slowly (90+ days): interest costs on a revolving facility rise proportionally, but a factor rate product’s total cost stays fixed. However, the effective APR on the MCA is still high.
For most recurring inventory cycles, a revolving credit facility is more cost-effective than an MCA — particularly for businesses that buy and sell stock on a regular basis. For a full side-by-side comparison, see inventory financing options compared.
Five questions to ask before you commit
1. What is the APR or effective annual cost?
Do not accept a monthly rate or factor rate without converting it. Ask the lender to state the APR explicitly.
2. Are there early repayment penalties?
Term loans often carry them. Revolving credit facilities typically do not — but confirm before signing.
3. Are there arrangement or origination fees?
A low rate with a high arrangement fee can be more expensive than a slightly higher rate with no fee. Add fees into your total cost calculation.
4. Is interest charged on the drawn amount or the full facility limit?
With a revolving credit facility, you should only pay interest on what you have drawn — not on the full approved limit.
5. What is the total repayment amount?
For any product, ask: “If I draw £X and repay over Y months, what is the total amount I will repay?” This is the most honest comparison you can make.
Next steps
For a full comparison of how revolving credit, term loans, merchant cash advances, and supplier credit compare across flexibility, speed, and cost:
Inventory financing options compared →
To understand what lenders look for before you apply:
What you need to qualify for inventory funding →
Return to the Inventory Funding hub → to explore more guides.