What Does Factor Rate Mean In Commercial Finance?
A factor rate, when used in finance, is used to calculate the cost of borrowing as a multiplier rather than as an interest rate.
It can be used to calculate the total cost of borrowing over a given period and the total repayment amount. The factor rate includes the original borrowing amount (the 1) and the cost of the borrowing, usually the margin charged by the lender.
Factor rates may be used for a merchant cash advance, a business loan and also invoice finance.
Factor Rate Example
Finance or loan amount: £100,000
Factor rate: 1.20
Cost of borrowing: (£100,000 x 1.20) minus £100,000 = £20,000
Total repayment: £100,000 x 1.20 = £120,000
Why a factor rate is not an interest rate
This is the part that catches people out. Interest accrues over time, so repaying early costs less. A factor rate does not. The £20,000 above is fixed on day one whether the facility runs for four months or twelve, so there is usually no saving in clearing it early.
It also means a factor rate cannot be compared directly against an APR. A factor rate of 1.20 repaid over six months is a far higher annual cost than the same 1.20 repaid over twelve, because you are paying the same fixed fee for half the time. Converting to an equivalent annual figure is the only way to compare a factor rate against a term loan, and on short facilities the converted number is often several times the headline.
Across the merchant cash advance market in September 2026, factor rates run from about 1.03 to 1.35, with most cases between 1.10 and 1.25. Rates are set case by case on turnover, sector and trading history rather than published, so two lenders can quote materially different figures on the same business.
Our factor rate calculator works out the total cost for any advance and rate, and converts it into an equivalent annual cost so you can compare it against a term loan.
Related terms
See also MCA, merchant cash advance, where factor rates are most commonly used.
For lender ranges, eligibility and how repayment works in practice, see merchant cash advances.
Bolton Business Finance is a whole of market commercial finance broker. Call 0161 546 9128.
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