What revenue-based finance costs,
and why speed makes it dearer
Revenue-based finance costs a fixed fee agreed up front, quoted as a factor rate. Borrow £30,000 at a factor of 1.2 and you repay £36,000, so the cost is £6,000 however long repayment takes. There is no interest, which means the cost per year depends on how fast your takings clear it, and a fast clearance makes it dearer as an annual rate, not cheaper.
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Three numbers in every offer
- The factor rate
The multiple you repay. 1.2 means £1.20 back for every £1 advanced. It is fixed the day you sign and does not grow if a slow season drags repayment out.
- The share of takings
The percentage of each day’s card or bank receipts the provider collects, sometimes called the holdback or sweep. It sets the pace of repayment, not the price, but a higher share clears it sooner and squeezes your cash more while it runs.
- Anything taken off the advance
Ask whether any fee is deducted before the money reaches you. A fee off the top means you repay the full factor on money you never received, which raises the real cost.
- What early settlement is worth
Usually little or nothing. Because the fee is fixed, paying off early tends to save no money. Some providers offer a discount for settling early; ask, and get the figure in writing.
£30,000 at three factor rates
Illustrative factor rates, no provider named. Your own is set against your card turnover and trading history.
The fee does not change with time. That is the single most important thing to understand about the product, and the reason the next table exists.
How your takings decide what it costs per year
The same £30,000 at a factor of 1.2, repaid at 12% of card takings. One business takes £40,000 a month all year; the other has three quiet months at £25,000 straight after the advance lands.
Illustrative. The last row is the 20% fee scaled to a year — 20% × 12 ÷ months to clear — on the assumption that you took a fresh advance each time one cleared. It is not an APR, and an APR on the reducing balance would be higher still, because you hold less of the money as it is repaid.
Reading a factor rate against a loan
The quiet-season business paid exactly the same £6,000 and, as a cost per year, paid less. That is the trade the product offers: you give up a low price in exchange for a repayment that falls when trade falls. If your takings are steady and predictable, you are paying for flexibility you will not use, and a term loan is likely to be cheaper.
To compare the two honestly, put both in pounds over the same period. A factor of 1.2 cleared in seven or eight months works out at around 30% a year on the renewal basis above, before you allow for the balance falling as you repay, which is well above most unsecured loan pricing for an established company. A loan and an advance on the same £20,000 works through it line by line, and flat rate vs APR explains why a multiplier and an annual rate never compare by eye.
When the price is worth paying
It earns its cost where the alternatives are worse rather than cheaper. A restaurant or shop with strong card takings and thin filed accounts may not get a term loan at all. A seasonal business that cannot meet a fixed payment in February benefits from one that shrinks with takings. And when speed matters, card data can be read and funded within a day or so, faster than most loans.
It is poor value as a habit. Renewing an advance as soon as the last one clears, quarter after quarter, turns a 20% fee into a standing cost of a quarter or more of the money every year. If you find yourself doing that, the need is permanent and wants a permanent facility, such as a credit line or a loan sized properly.
Send us your monthly card takings and we will price an advance and a loan side by side.
Get my optionsCommon questions
How do I work out the cost of a merchant cash advance?
Multiply the advance by the factor rate to get the total you will repay, then take away the advance. £30,000 at 1.2 is £36,000 repaid and £6,000 of cost. Deduct any fee taken off the advance first if you want the real figure.
What is a holdback percentage?
The share of each day’s card or bank receipts the provider collects until the agreed total is repaid. It varies by provider and by business, and it is agreed before you sign. It sets how quickly you repay, not how much.
Is a factor rate of 1.2 expensive?
It depends entirely on how fast you repay. Cleared in a year, 20% of the advance is in the region of a high-priced loan. Cleared in four months, the same fee is very dear money. Judge it by your likely repayment time, not the number on its own.
Are there fees on top of the factor rate?
Sometimes. Ask whether anything is deducted from the advance, whether there is a charge if takings stop, and what happens if you change card provider. The factor rate should be the bulk of the cost, but get every fee written down before you sign.
Can I top up an advance before it is repaid?
Many providers offer renewals once part of the balance is cleared. Check how the remaining balance is handled: if it is paid off out of the new advance, you can end up paying a fresh fee partly on money you had already borrowed.
See whether an advance or a loan costs less
Tell us your card takings and we will put both options in pounds before you choose.
Get my optionsWhere to next
Revenue-based finance Back to the hubRepay more in a good month, less in a quiet one.Loan vs cash advanceA factor rate is not an interest rate, and early repayment saves nothing.Flat rate to APR calculatorConvert any flat-rate quote to an APR in one step.Which option fitsStart from the cause of the gap, not the product.