Factor rate to APR converter

3 min read

Factor → APRLike-for-like comparison

Total cost in £The number that bites

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What this calculator does

Merchant cash advances and some revenue-based finance aren't priced with an interest rate — they use a factor rate, a simple multiplier like 1.2 or 1.4. Borrow £20,000 at a factor of 1.3 and you repay £26,000, full stop. It looks refreshingly clear, but it hides how expensive the money really is, because there's no rate to compare against a normal loan. This calculator fixes that.

Enter the advance, the factor rate and the expected repayment period, and it returns the total repayable, the cost of credit in pounds, and an approximate annualised rate. That last figure is the one that lets you put a factor-rate offer next to a conventional facility and see, plainly, which is dearer.

How to use it

Three inputs:

Advance amount — the cash actually paid to you.
Factor rate — the multiplier in the offer, typically between about 1.1 and 1.5. Multiply it by the advance to get the total you'll repay.
Expected period — how many months it will realistically take to clear. With a merchant cash advance this depends on your card takings, so the period is an estimate, not a fixed term.

The shorter the real repayment period, the higher the annualised cost — because you're paying the same fixed premium over less time. That's the crucial, counter-intuitive point a factor rate obscures.

Why a factor rate hides the true cost

A factor rate has no time dimension. "1.3" tells you the total cost but says nothing about whether you repay it over six months or eighteen — and time is everything in the cost of borrowing. Repaying a 1.3 factor over six months is roughly twice as expensive, in annualised terms, as repaying the same factor over twelve, even though the pounds repaid are identical.

That's why a factor rate can't be compared with an APR directly. A factor of 1.2 might sound gentler than a 20% loan, but if it's cleared in six months its annualised cost is far higher. Converting to an approximate annual rate is the only honest way to compare a merchant cash advance with a term loan or credit facility.

The formula in plain English

The simple parts first:

Total repayable = advance × factor rate

Cost of credit = total repayable − advance

The annualised rate is an approximation, because there's no fixed term:

Approx. annual cost ≈ (cost ÷ advance) ÷ (months ÷ 12) × 100

So a 1.3 factor is a 30% total cost; spread that 30% over the fraction of a year it takes to repay and you get the annualised figure. Over twelve months it's roughly 30%; over six months it's closer to 60%. This treats the cost as if it were charged on the full balance throughout, which is the right comparison for a fixed-fee advance where the premium doesn't fall as you repay.

Worked example

A café takes a £20,000 advance at a factor rate of 1.3, repaid from card sales over an expected 9 months.

Total repayable = £20,000 × 1.3 = £26,000. Cost of credit = £6,000. Annualised ≈ (£6,000 ÷ £20,000) ÷ (9 ÷ 12) × 100 = 30% ÷ 0.75 = about 40%. That gentle-sounding 1.3 is, in annual terms, roughly double a 20% loan. If trade is brisk and it clears in six months, the annualised cost climbs to around 60%. Figures are illustrative, not a Credicorp quote.

Limitations to keep in mind

The annualised figure is an approximation by nature — a merchant cash advance has no fixed term, so the real rate shifts with your trading. Faster takings mean you repay sooner, which paradoxically raises the annualised cost. The calculator also can't see additional fees some providers add on top of the factor; press for the full breakdown.

None of this means a cash advance is always wrong — for a short, urgent need with no other option it can earn its keep. But compare it honestly. Line the converted rate up against a conventional facility using the overdraft vs loan calculator and the true cost of borrowing calculator, and check the spend justifies the price with the return on borrowing calculator. This is general information, not financial advice.

Frequently asked questions

Is a factor rate the same as an interest rate?

No. An interest rate is charged over time on a reducing balance; a factor rate is a one-off fixed multiplier with no time element. That's why a factor of 1.3 isn't a 30% interest rate — once you account for repaying it over only a few months, its annualised cost is usually far higher.

Why does repaying faster make a cash advance more expensive?

Because the cost is fixed in pounds regardless of how quickly you clear it. Repay a 1.3 factor in six months instead of twelve and you pay the same premium in half the time, so the annualised rate roughly doubles. With a normal loan, paying early saves interest; with a factor rate, it doesn't.

Should I avoid merchant cash advances entirely?

Not necessarily — for a very short, urgent need they can suit, and repayment flexing with your takings has its appeal. But they're typically among the most expensive ways to borrow once annualised. Always convert the factor rate to a comparable figure and check whether a conventional facility would cost far less first.