Factor Rate vs APR, How to Compare Offers Properly

If one offer says a 1.35 factor rate and another says 29% APR, you are not comparing like for like yet. APR works well when repayments are fixed. With revenue linked repayments, you need to focus on total payback and time to repay. This guide shows you how to compare offers in pounds, not buzzwords. When you want a live quote, compare merchant cash advance offers.

Quick Definitions in Plain English

APR is the annual percentage rate. It rolls interest and fees into a yearly cost. It suits loans with fixed schedules and known terms.

Factor rate is a multiplier, for example 1.30, that you apply to the amount you receive. It tells you total payback, not an annual percentage. A factor rate does not change with time. You owe the same total whether you clear it in three months or twelve.

Mini Glossary

• Total payback, the full amount you will repay in pounds.
• Fees, origination, underwriting, admin, broker, legal, and any settlement fee. See the FCA note on how charges can sit inside an annualised figure, APRC calculations.
• Term estimate, the lender’s projection of months to repay at a given sales level.
• Holdback, the share of daily or weekly card takings used to repay the advance.
• Early settlement rules, what happens to the remaining fee if you repay early.

Why Factor Rates Can Look Cheap or Expensive

A factor rate does not include time. That is the key. If you repay faster, the annualised cost is higher because you pay the same fee over fewer months. If you repay slower, the annualised cost is lower because the same fee is spread across more time. Cash flow impact matters more than the label on the product. Look at how money leaves your account each day or week and for how long. For a primer on cash flow tools, see the British Business Bank guide to cash flow finance.

Worked Example, Same Total Payback, Different Implied APR

Advance, £20,000

Factor rate, 1.30

Total payback, £26,000

Total cost in pounds, £6,000

Scenario A, repaid in 6 months

• Simple cost fraction, £6,000 ÷ £20,000 = 0.30, that is 30% of principal.
• Implied annualised cost, 30% ÷ 6 months × 12 months ≈ 60% per year.

Scenario B, repaid in 12 months

• Simple cost fraction remains 30%.
• Implied annualised cost, 30% ÷ 12 months × 12 months ≈ 30% per year.

These are simple, directional figures. Actual APR for revenue linked repayments will vary with daily balances and cash flow patterns. The takeaway is clear, repayment speed changes the effective cost. This is why two offers with the same factor rate can behave very differently in the real world. If you want to see how an MCA might map to your takings, you can review your merchant cash advance options.

The Comparison Framework, How to Compare Offers Properly

Step A, Get the True Total Payback in Pounds

• Confirm the amount you will receive after any broker or origination fee.
• Write down the stated total payback.
• Add every fee, origination, underwriting, admin, card processing, broker, legal, and settlement.
• Record whether fees are taken upfront or added to the balance.

Step B, Estimate the Payback Time Using Realistic Sales

• Use average monthly card sales, not your best month.
• Ask the provider which sales level their term estimate assumes.
• If sales are seasonal, run two cases, peak month and slow month.

Step C, Understand Cash Flow Impact

• Note the holdback percentage.
• Confirm whether collection is daily, weekly, or per batch.
• Ask what happens in slow periods, pause rules, catch up rules, and any minimum payment.
• Estimate the average weekly or daily deduction at your sales level.

Step D, Compare Like for Like

• Put both offers on the same assumed sales level and the same repayment horizon.
• If one assumes four months and the other ten months, rewrite both to a single scenario.
• Now compare total payback, estimated months to repay, and weekly or daily deduction side by side.

Ready to apply the checklist to real quotes, compare MCA providers and get terms based on your recent sales.

An Apples to Apples Table You Can Copy

Common Traps That Mislead Comparisons

• Quoting a low factor rate but hiding fees in the small print.
• Using a best month of sales to show a short term that you will not meet.
• Ignoring early settlement rules; many factor products charge the full fee even if you clear early, some offer partial discounts.
• Comparing APR on a fixed loan against a factor rate on an MCA without aligning the assumed term and cash flow. For APR basics, see APR explained.

Who Should Care Most About This Comparison

Speed is vital for many firms. Cost still matters. You will benefit from this checklist if you run tight margins, rely on card sales, or see clear peaks and dips across the year. It also helps if you already pay other daily or weekly deductions and need to control overlap. If you fit that profile, review your merchant cash advance options today.

What To Do Next

Start with total payback and repayment behaviour, then compare like for like. When you are ready, compare merchant cash advance offers. You can also bookmark a plain-English guide to MCAs from the British Business Bank.

Appendix, A Simple Way to Annualise a Factor Rate

Use this simple method to get a rough annualised cost so you can compare options.

1. Calculate total payback, amount received × factor rate.
2. Find total cost, total payback minus amount received.
3. Divide cost by the amount received to get a simple cost fraction.
4. Annualise, multiply that fraction by 12 and divide by months to repay.

This gives a rough figure. It is enough to see the direction and avoid false bargains. For revenue linked products, cash flow fit still comes first.

Optional Tools

• A mini calculator can estimate months to repay and weekly deductions, input your advance, factor rate, average monthly card sales, and holdback percentage.
• Download a one page checklist, “Seven questions to ask before signing an MCA.”

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