A merchant cash advance factor rate tells you how a quoted total collection amount relates to the advance. It does not tell you the annual cost of funding. A factor rate of 1.20 means £12,000 is due against a £10,000 advance, before considering any separate charges. It does not mean 20% APR.
To compare that advance with another funding offer, you need the cash actually received, every required payment, and when those payments are expected to leave your business. The same £2,000 funding charge can have very different annualised equivalents over three, six or twelve months.
The examples below show the calculations and their limitations. They are hypothetical comparisons, not provider quotations or representations of current market prices. Annualised figures are mathematical cash-flow equivalents, not certified statutory APR disclosures.
Factor rate, fixed fee and collection percentage: three different figures
These terms answer different questions. Keeping them separate prevents a misleading comparison.
| Figure | What it measures | Illustrative example |
|---|---|---|
| Factor rate | Total agreed collection divided by the stated advance | £12,000 ÷ £10,000 = 1.20 |
| Fixed funding fee | Difference between the quoted advance and total agreed collection, excluding other charges | £12,000 − £10,000 = £2,000 |
| Sales collection percentage | Share of qualifying sales allocated to the advance | 10% of qualifying sales |
| Annualised cash-flow equivalent | A rate calculated from cash received and the amounts and timing of payments | Depends on the repayment schedule |
Suppose your agreement provides £10,000, requires £12,000 in total and collects 10% of eligible sales. The funding charge is £2,000. The 10% is the collection percentage; it is neither the fee percentage nor an interest rate.
At £20,000 of qualifying monthly sales, a simple 10% collection calculation produces £2,000 of monthly collections. At £10,000 of qualifying sales, it produces £1,000. Contractual minimums, definitions of sales and other conditions can change the amount actually payable.
Provider terminology is not uniform. Read the definitions in the actual agreement instead of assuming that “rate”, “percentage” and “fee” describe the same thing.
Why a factor rate cannot be read as APR
The factor calculation contains no time variable. It also ignores the fact that money is normally collected progressively rather than in one payment at the end.
If you receive £10,000 and pay it down throughout six months, you do not retain the full £10,000 for all six months. Comparing the £2,000 fee only with the original advance misses the shrinking amount of funding available to the business.
A loan quotation can also contain several different measures: an interest rate, an APR where applicable, total interest, fees and total amount payable. Ask which measure the provider is showing. The British Business Bank’s business-loan guide explains that loan terms, pricing and repayment arrangements vary, including fixed and floating interest rates and potential early-repayment charges.
An MCA cash-flow calculation can help compare timing and cost, but does not determine the legal classification of the agreement or which disclosure rules apply to it. Those questions require consideration of the actual product, borrower and contract.
Example 1: a £10,000 advance with a 1.20 factor rate
Assume the following:
- Your business receives exactly £10,000 on day one.
- The total amount to be collected is £12,000.
- There are no additional fees or deductions.
- Payments occur at the end of equally spaced months.
- Each payment is equal within the scenario being tested.
The factor rate and funding fee are identical in all three scenarios below. Only repayment timing changes.
| Scenario | Monthly collection | Number of months | Total collected | Effective annualised cash-flow equivalent |
|---|---|---|---|---|
| Faster collection | £4,000 | 3 | £12,000 | 203.76% |
| Middle scenario | £2,000 | 6 | £12,000 | 89.51% |
| Slower collection | £1,000 | 12 | £12,000 | 41.30% |
These figures do not mean that the business pays £20,376 in fees in the three-month example. It still pays the assumed £2,000 charge. Annualisation expresses that short-period cost as an equivalent annual rate using a consistent mathematical convention. It does not predict repeated borrowing or add charges to the contract.
The practical lesson is that the factor rate alone is insufficient. Two offers with a 1.20 factor may collect over very different periods, leaving very different amounts of cash available for stock, wages and tax.
How the annualised figures were calculated
For the six-month example, solve for the monthly rate that makes the present value of six £2,000 payments equal £10,000. The monthly rate is approximately 5.4718%.
Convert that monthly rate to an effective annual figure:
Effective annualised equivalent = (1 + monthly rate)¹² − 1
Using 0.054718 as the monthly decimal rate gives approximately 89.51%.
Multiplying the fee percentage by two would give 40%, but that shortcut assumes a different cash-flow pattern and does not account for progressive collections. Multiplying the monthly rate by twelve gives a nominal annual figure, which is also different from the effective annual figure in the table. Comparisons must use the same convention.
For daily or irregular payments, calculate using the actual payment dates rather than pretending they were equal monthly instalments. A dated cash-flow calculation such as XIRR can assist, provided signs, dates and all charges are entered consistently. Its output still needs to be described accurately rather than automatically labelled a contractual APR.
Example 2: an upfront deduction increases the cost of usable funds
Now assume the advertised advance remains £10,000 and the total collection remains £12,000 over six equal monthly payments, but £500 is deducted upfront.
Your bank receives £9,500. The six payments are still £2,000 each.
| Measure | No upfront deduction | £500 upfront deduction |
|---|---|---|
| Stated advance | £10,000 | £10,000 |
| Usable cash received | £10,000 | £9,500 |
| Total future collections | £12,000 | £12,000 |
| Difference between collections and cash received | £2,000 | £2,500 |
| Effective annualised equivalent | 89.51% | 128.08% |
The stated factor rate can remain 1.20 even though the cost relative to cash actually available has increased. That is why a comparison should start with the net proceeds reaching the bank account.
Ask the provider to explain every deduction. An arrangement fee, broker charge or settlement of existing finance should be identified separately. A refinance requires particular care: money used to clear an old balance is not new cash available for a stock purchase, although extinguishing the old obligation has value that should be assessed in the wider comparison.
Example 3: sales timing changes the cash-flow impact
Suppose a hypothetical MCA receives 10% of qualifying sales until £12,000 has been collected. There are no minimum payments in this simplified model.
| Month | Qualifying sales | Collection at 10% | Remaining amount after collection |
|---|---|---|---|
| 1 | £30,000 | £3,000 | £9,000 |
| 2 | £25,000 | £2,500 | £6,500 |
| 3 | £15,000 | £1,500 | £5,000 |
| 4 | £10,000 | £1,000 | £4,000 |
| 5 | £20,000 | £2,000 | £2,000 |
| 6 | £20,000 | £2,000 | £0 |
The total and final month match the six-month example, but more cash is collected near the beginning. Its annualised equivalent will therefore differ from six equal £2,000 payments. An average monthly payment cannot capture that difference.
This example also shows why repayment speed is not the only issue. The £3,000 collected in month one may coincide with supplier invoices, payroll or a tax payment. Assess affordability against the dates of those obligations, not just a monthly sales average.
For a practical forecasting structure, see our UK guide to including MCA repayments in a cash-flow forecast.
Early settlement does not always reduce a fixed fee
Do not assume that paying early produces the interest savings associated with some loans. The agreement may retain the full fixed charge, offer a stated discount, or use another settlement mechanism.
For example, Shopify’s UK merchant cash advance guidance states that remitting the remaining balance does not reduce the termination amount. That is a provider-specific example, not a rule for every MCA.
Obtain a dated settlement quotation and compare it with the remaining scheduled or projected collections. If another provider is financing the settlement, include the new fees and any new deductions. A lower daily collection can still mean a higher total cost over a longer period.
A comparison checklist for actual offers
Before choosing between an MCA and a loan, request the following in writing:
- Net funding: the amount that will reach your business bank account.
- Total cost: all fixed charges, interest, arrangement fees and other required payments.
- Collection basis: which sales count, including how refunds, VAT, cash sales or multiple payment processors are treated.
- Timing: payment frequency, commencement date, estimated completion date and any deadline or minimum payment condition.
- Security: business security, personal guarantees and other obligations.
- Early settlement: the actual amount needed to end the arrangement and any conditions for a discount.
- Stress scenarios: what happens if sales fall, are interrupted, or grow faster than expected.
Prepare a like-for-like comparison using the same net amount and reasonable payment dates. Compare both the total pounds paid and the effect on available cash. An annualised figure provides a useful lens, but cannot tell you whether a particular agreement fits your business or whether its non-price terms are acceptable.
Prepare the application records using our guide, Merchant Cash Advance Documents UK.
Avoid borrowing merely because a headline factor looks small. If the funding is intended to buy inventory, estimate the cash margin after stock costs, returns, fulfilment, overheads and financing charges. A higher sales forecast is not the same as a reliable repayment source.
Frequently asked questions
Is a 1.20 factor rate the same as 20% interest?
It represents a 20% uplift on the stated advance in the simple example. It is not automatically an annual interest rate. Timing, progressive collections and separate charges change the comparison.
Can a lower factor rate be more expensive on an annualised basis?
Yes. A smaller fee collected much sooner can have a higher annualised equivalent than a larger fee collected over a longer period. Compare dated cash flows rather than ranking factor rates alone.
Does slower repayment make the agreement cheaper?
It can reduce the calculated annualised equivalent when the total charge stays fixed, but it does not necessarily reduce the pounds paid. Slower sales can also worsen business cash flow or create contractual difficulties. Do not delay required payments to manipulate a comparison rate.
Should I use APR alone to choose business finance?
No. Use a consistent cost comparison alongside total repayment, affordability, security, flexibility and contractual obligations. An offer that appears cheaper can still be unsuitable if repayments occur before customers pay you.
Compare the full agreement before committing
Bring the actual offer, net proceeds, fees and proposed repayment schedule to the comparison. For sales-based funding, include a realistic forecast and a lower-sales scenario rather than a single optimistic repayment date.
Contact Mehmi Financial Group to discuss the type of business funding you are seeking and the information needed to compare potential options. Mehmi Financial Group is a commercial financing brokerage, not a direct lender. Product availability, approval and terms depend on the independent provider and your circumstances. This article provides general information rather than advice on a particular agreement.