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Merchant Cash Advance: What is a Factor Rate?

A ‘Factor Rate’ of interest is a term normally associated with Merchant Cash Advance finance, or MCA for short. Merchant Cash Advance finance is when a business is able to borrow against the revenue forecasted to go through your Card Machines. For example, if you turnover £5,000 a month, you can borrow £5,000 from a lender, and pay it back daily from your takings.

A factor rate of interest is not expressed in percentages like standard interest rates but as a decimal figure. These will range from around 1.1 and even up to 1.9. This number represents the amount you will pay back on your loan

While factor rates sound straight forward, there is a lot you need to think about if you are thinking about applying for a merchant cash advance.

How Does a Factor Rate Work?

If your business is looking for a short term funding option, to boost your cash flow or to give you working capital quickly, a merchant cash advance could be a good option.

Unlike a standard loan, where you have a variable or fixed interest rate to pay back, MCAs or Cash Advance Loans, are calculated using a decimal figure that presents what times the loan you must pay back.

Other short term loans with Tier 3 or 4 lenders, might also use factor rates or buy rates to determine your total repayments.

Your factor rate is usually dependant on how long you have been in business and your average monthly turnover through your card machines.

Understanding Your Factor Rate

It is important to understand how interest is calculated on a factor rate loan, compared to a standard interest rate loan. Businesses don’t often think of this and can sometimes get very unstuck.

When thinking about Factor Rate loans, it is about determining what your total repayment will be.

For Example:

Say my business got a Cash Advance of £10,000 at a factor rate of 1.5 for a 12-month term. 

The total amount my business will need to pay back is £15,000 (£10,000 x 1.5 = £15,000). Having the knowledge that you are paying £5,000 for that £10,000, at first glance, you might think you’re paying 50% interest rate for the short term advance.

However, this is the wrong way to think about this.

The total interest cost of the loan is 50%, however, when a factor rate is being used to calculate interest, it predetermines your interest in one lump upfront when the cash is advanced. An interest rate loan (APR), may have the same interest rate, but the interest is calculated on what is left owing on the loan every month, rather than upfront at once.

For example, a £10,000 loan on the same APR (50%) as a Merchant Cash Advance Factor Rate (1.5) – would cost  £2661.94, compared to the Factor Rate of £5,000.

Other things to be aware of with Merchant Cash Advances are are that they are calculated daily. In other words, if you have a cracking day, you will pay more of your loan back on that day, when compared to a quiet day. This could mean that your cash flow could again be stretched if you were relying on those busy days to fund you through a quiet period.

How Do I Apply for a Merchant Cash Advance

We help companies every month access MCAs around the UK. There a number of providers who offer this finance, which can make the market nice and competitive. These products are really good for small cafes, bars and other retail shops that have strong card sales.

To process an application, and help you find the best rate across the market, I will need the following documents:

  • Merchant Services Statements. Usually, between 3 – 6 months of statements from your card provider.
  • Business Bank Statements. I will need your last 6 months of company bank statements.
  • Years in Business. For most lenders, that would be competitive, I will require a minimum of one-year trading history.
  • Companies House Return. I will also require your last Ltd Companies return, filed with companies house.

At the end of the day, like with any finance, it is about risk. If a lender can see numbers that stack up, the cheaper the rate will be. If a lender is worried about your numbers or your industry, you might find your rates being higher.