Quick answer
Factor pricing sets the total amount you repay as a multiple of the amount borrowed, fixed at the start. It is common with short-term unsecured loans and merchant cash advances. Because the cost does not reduce as you repay, it behaves differently from interest on a reducing balance: shorter terms make it more expensive per month, and early repayment may save little. Convert any factor offer to dollars to compare it.
Key points
- The total to repay is fixed upfront as a multiple of the advance.
- Cost does not fall as the balance is repaid.
- The same factor costs more per month over a shorter term.
- Ask whether any early settlement discount applies.
Checklist
- Advance amount and fees deducted
- Total to repay
- Expected time to repay
- Any early settlement discount
- Cost per dollar and per month calculated
Short-term business lending often uses a pricing method that looks simple and behaves very differently from the interest most people know. Instead of charging interest on the balance as it falls, the lender sets a total amount to repay at the start, usually expressed as a multiple of the amount borrowed. That approach is called factor pricing, and understanding it can save you from comparing apples with oranges.
How factor pricing works
You borrow an amount. The lender multiplies it by a factor to set the total you will repay. That total is then divided into daily, weekly or monthly instalments over the term, or collected as a share of card sales in the case of a merchant cash advance. The cost of finance is the difference between the total and the amount borrowed, plus any fees.
The key feature is that the cost is fixed at the start. It does not shrink as you repay. With interest on a reducing balance, each repayment reduces the balance and therefore the future interest. With factor pricing, the total is the total.
Why the term changes everything
Because the cost is fixed regardless of how long you hold the money, the same factor costs more per month over a shorter term. Imagine (illustratively) a fixed cost of $10,000 on a $50,000 advance. Spread over twelve months, that is around $833 per month of borrowing. Repaid over six months, it is around $1,667 per month. The headline factor did not change; the effective cost per month doubled.
This is why factor-priced offers can look cheaper than they are, especially when they are repaid quickly from strong sales.
Early repayment under factor pricing
If your business has a great month and you want to clear the loan, a factor-priced loan may still require most or all of the original total. Some lenders offer an early settlement discount; many do not, or offer only a small one. Before signing, ask for the payout method in writing with an example. Our guide to early repayment and payout figures explains what to ask, and the early payout savings calculator shows the actual saving.
Converting a factor offer to dollars
You do not need the factor to compare offers. You need four numbers:
- the amount you will receive after fees;
- the total you will repay;
- any other fees;
- how long you expect repayment to take.
From those, calculate total cost, cost per dollar received and cost per month. The true cost calculator does this, and the offer comparison calculator lines up a factor offer against a conventional loan.
Where factor pricing appears
| Product | How it is commonly priced |
|---|---|
| Merchant cash advance | Fixed total collected from card sales |
| Short-term unsecured loans | Often fixed total with daily or weekly repayments |
| Some invoice products | Fees as a share of invoice value per period |
| Longer term loans | Usually interest on a reducing balance |
When factor pricing can still make sense
Factor-priced finance is not automatically bad. If you need money for a short, specific purpose that clearly earns more than the cost, such as a supplier discount or a profitable order, the certainty of a fixed total can be useful. The key is knowing the effective cost and comparing it with alternatives before you commit.
Questions to ask about a factor-priced offer
- What is the total amount to repay, and are there fees on top?
- How long do you expect repayment to take at my usual sales?
- Is there an early settlement discount, and how is it calculated?
- What happens if my sales fall and repayment takes longer?
- Are repayments fixed or a share of sales?
An illustrative example
A made-up café owner is offered a cash advance with a fixed total to repay from card sales. At her normal takings it would be repaid in about seven months. She converts it to dollars and finds the cost per month is far higher than an equipment loan for the coffee machine she actually needs. She chooses the equipment loan.
Factor pricing and repayment frequency
Factor-priced loans often come with daily or weekly repayments. That combination matters: the fixed total cost is collected quickly, and frequent debits leave less cash in the account between customer payments. Before agreeing, map the debits against your actual banking pattern, especially in quieter weeks. Our guide to daily, weekly and monthly repayments shows how to test it. If repayments are taken as a share of card sales rather than fixed debits, check whether there is a minimum payment that applies when sales are slow, because that can remove much of the flexibility the structure promises.
Stacking factor-priced loans
Taking a second factor-priced loan before the first is repaid is a common trap. Each loan’s fixed cost is locked in, and two sets of frequent repayments can quickly overwhelm cash flow. If you find yourself considering it, look instead at consolidating into a single facility with a longer term.
Want help comparing a factor-priced offer?
If you have an offer quoted as a total to repay and want to see how it stacks up, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than many. Include the amount, the total to repay and the expected term in your enquiry so the comparison is accurate.
Frequently asked questions
Is a factor the same as an interest rate?
No. A factor is a multiplier applied to the amount borrowed to set the total repayment, fixed at the start. Interest is usually charged over time on the outstanding balance. The two cannot be compared directly without converting to dollars and time.
Why do some lenders use factor pricing?
It is simple to explain and administer for short-term products, and it fixes the lender's return regardless of how quickly the loan is repaid. For borrowers, it gives certainty about the total cost.
Does repaying early reduce the cost under factor pricing?
Often not much, unless the contract offers an early settlement discount. Ask before signing, and check the payout clause.
How do I compare a factor offer with a normal loan?
Work out total cost, cost per dollar received and cost per month for each offer. The offer comparison calculator puts them side by side.
Are factor-priced loans always expensive?
They can be reasonable for very short, high-value uses, but the effective cost per month is often higher than it first appears. Compare carefully.
Sources and further reading
We are an information site, so we do not rank lenders, publish interest rates or accept payment to feature a product. Every page is written and checked by our editorial team against official sources. Read our editorial policy and how we are funded.
