What is a factor rate loan and how does early repayment work?

A factor rate loan is a type of business finance where the cost is expressed as a fixed multiplier applied to the original loan amount at inception, rather than as a percentage interest rate charged on the outstanding balance. For example, a £200,000 loan at a factor rate of 1.5 results in a total repayment obligation of £300,000 — regardless of how quickly it is repaid. This is fundamentally different from a traditional interest-bearing loan, where early repayment reduces the outstanding balance and therefore the interest charged. With a factor rate loan, early repayment does not reduce the total amount owed — the full £300,000 remains due whether paid over 6 months or 24 months. Merchant cash advances (MCAs) and many alternative business loans operate on factor rate or similar fixed-cost structures. Directors sometimes believe these facilities can be refinanced to reduce the cost; in most cases refinancing simply incurs a new factor rate on the remaining balance, adding further cost rather than reducing it. When evaluating any business finance, the relevant question is not the factor rate but the total repayment obligation and the monthly payment required.