Quick answer
A factor rate is a multiplier used by some short-term business lenders to set the total amount repayable. Multiply the amount borrowed by the factor to get the total, then subtract the amount borrowed to get the cost. Unlike interest that accrues over time, the full factor cost is often payable even if you repay early, so the effective cost can be high on short terms.
Key points
- Total repayable equals the amount borrowed times the factor
- The cost is usually fixed regardless of how fast you repay
- Short terms make factor pricing more expensive in effect
- Always convert to total dollars and compare
The simple arithmetic
A factor rate is usually a number a little above one. To find what you will repay, multiply the amount borrowed by the factor. If you borrow an amount and the factor is set so that you repay that amount plus a further fixed sum, that further sum is the cost of the loan. It is that straightforward, and that is part of the appeal: one number, one total, no surprises from changing rates.
Why it can be misleading
The simplicity hides two things. First, the cost does not depend on how long you hold the money. With conventional interest, a loan repaid in three months costs less than one repaid in twelve. With a factor, the total is often the same either way. Second, because the whole cost is squeezed into a short term, the effective cost of the money on an annual basis can be much higher than the factor suggests. A factor that looks modest on a long term can be expensive on a short one.
Early repayment
This is where factor pricing surprises many owners. A business that has a strong month and repays early often finds it still owes the full agreed cost. Some lenders offer a discount for early settlement; many do not. If you might repay early from a contract payment, refinance or strong season, ask specifically about early settlement and get the answer in writing.
Converting to compare
The fair comparison is total dollars repaid and repayment size. Take each offer for the same amount: write down the total repayable, the fees, the term and the repayment frequency. Then use the repayment calculator to see the daily, weekly and monthly equivalents and the repayment as a share of your deposits. Our guide on comparing offers on total cost walks through the method.
When factor pricing can make sense
For a short, high-return use, such as buying discounted stock that sells quickly at a strong margin, a factor-priced loan can be worthwhile even if the effective cost is high, because the profit on the stock exceeds it. The danger is using factor-priced finance for slow, low-return or ongoing needs, where the cost compounds into a cash flow problem.
The stacking risk
Factor-priced loans and merchant advances are often easy to obtain, which makes it easy to take several. Combined daily repayments can overwhelm a business quickly. If you already have one, be cautious about adding another. See business loan stacking warning signs.
Questions to ask
What is the total amount repayable? Are there fees on top of the factor? How are repayments taken, and how often? Is there any discount for early repayment? What happens if a repayment fails? Clear written answers let you compare properly.
Alternatives worth checking
A line of credit lets you pay only for what you use and repay early to save. A conventional unsecured loan with interest that accrues may be cheaper if you expect to repay quickly. For larger needs, a property-secured loan with interest added to the balance can cost less in total and remove daily repayment pressure.
An illustrative example
A boutique owner was offered a factor-priced advance for summer stock and a conventional unsecured loan for the same amount. The factor offer looked cheaper at first glance. Converted to dollars, and given she expected to repay early from strong Christmas sales, the conventional loan cost less because its interest stopped when she repaid.
Get a clear comparison
Make a quick enquiry and share any offers you have. Enquiries carry no credit check, a person checks it, and one team handles it. Compare factor offers properly.
Frequently asked questions
Is a factor rate the same as an interest rate?
No. Interest generally accrues over time on the balance. A factor sets a fixed total cost up front.
Does repaying early reduce the cost?
Often not with factor pricing, though some lenders offer a discount. Check the contract.
Are factor-rate loans always bad?
Not necessarily. For short, high-return uses they can make sense. The key is knowing the total cost and comparing alternatives.
Which businesses are offered factor pricing?
It is common with merchant cash advances and some short-term unsecured loans, particularly for retail and hospitality.
How do I compare a factor offer with a conventional loan?
Convert both into total dollars repaid and repayment size for the same amount and term.
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