Definition
A factor rate is a multiplier some short-term lenders and merchant cash advance providers apply to the amount advanced to set the total to be repaid. The cost is fixed at the start and does not reduce as you repay, unlike interest on a reducing balance. Because of that, it is best compared with other offers by converting to dollars: total cost, cost per dollar and cost per month.
Factor pricing looks simple, which is part of its appeal. The simplicity hides how differently it behaves from ordinary interest.
How it works
Multiply the advance by the factor and you get the full sum owed. That total is collected through daily or weekly debits, or as a share of card sales, until it is paid.
Why it can be expensive
The cost is fixed whether you repay over six months or twelve, so a shorter repayment period means a higher cost per month. Early repayment may save little.
How to compare
Turn the offer into plain dollar figures: the overall charge, what each dollar advanced costs, and the monthly equivalent. The true cost calculator does this. Our guide to factor pricing goes deeper. Holding a factor-priced offer? Make one enquiry to compare.
Common questions
How is a factor rate different from interest?
No. The whole charge is locked in on day one, whereas interest normally accrues on whatever balance is left. They cannot be compared directly.
Does repaying early reduce the cost?
Often not much, unless the contract includes an early settlement discount.
Sources and further reading