What is Factor rate (RBF)?
Reviewed by CA Apurav GargLast reviewed
In short
A factor rate is the multiple of the advance a revenue-based financier is repaid, such as 1.12 times the amount funded. It is a flat fee, not an annual interest rate.
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How revenue-based financing works
In revenue-based financing (RBF), a financier advances money to a business, often a D2C or marketplace brand, and is repaid as a fixed share of the brand's future sales, usually deducted directly from payment gateway or marketplace settlements until a fixed total has been repaid.
That fixed total is set by the factor rate: total repayable = advance × factor rate. A factor rate of 1.12 on ₹50 lakh means ₹56 lakh is repaid, whatever the time it takes.
Why a factor rate is not an interest rate
An interest rate is charged per year on the amount still outstanding. A factor rate is a fixed fee charged once, on the full advance, however fast it is repaid. Two things follow:
- The faster you repay, the higher the real cost. The fee is the same, but you had the money for less time. Strong sales after taking RBF raise the effective annual rate, as the example shows.
- The figure looks small. A factor of 1.12 sounds like a modest charge. Spread over a few months, it is a high annual rate. To compare RBF with a bank loan or a working capital limit, convert it to an annual rate using the actual repayment dates: the internal rate of return (IRR) on the cash received and the repayments made.
Other costs to add
- Upfront fees deducted from the advance, so you receive less than the amount on which the factor rate is charged.
- GST on processing or platform fees. Ask the financier how each charge is described on its invoice and whether GST is charged on it.
- Minimum repayment clauses, which require a fixed amount even in a slow month, turning the advance into something closer to a loan.
When it can make sense
RBF is quick, usually needs no collateral and does not dilute ownership. It can fund inventory or marketing that will be sold through and repaid within a few months, ahead of a sale season. It is a costly way to fund losses or long-term spending. Compare its effective annual rate with the contribution margin the funded sales will earn.
In the accounts
Record the advance as a borrowing, not as revenue. The difference between the total repayable and the cash received is a finance cost, recognised over the repayment period, and each settlement deduction reduces the borrowing.
Example in rupees
A D2C brand with monthly revenue of ₹80,00,000 takes a revenue-based financing (RBF) advance:
| Term | Figure |
|---|---|
| Advance | ₹50,00,000 |
| Factor rate | 1.12 |
| Total to repay: ₹50,00,000 × 1.12 | ₹56,00,000 |
| Upfront processing fee deducted (2 in 100) | ₹1,00,000 |
| Cash actually received | ₹49,00,000 |
| Share of monthly revenue swept to repay (14 in 100) | ₹11,20,000 a month |
The ₹56,00,000 is repaid in five monthly sweeps of ₹11,20,000. The brand pays ₹7,00,000 more than it received, for about five months' use of the money. Expressed the way a bank loan is, that works out to an annual rate (APR) of about 55%. If sales jump during a sale season and the sweep grows, the advance is repaid in four months and the annual rate rises to about 72%, because the same ₹7,00,000 is paid for a shorter time. The figures are illustrative.
Related terms
Work it out for your business
Want help applying this to your own accounts?
We handle bookkeeping, GST and TDS for D2C and marketplace sellers, and can walk you through how this works in your business.
General information only, not professional advice. Rules and rates change — check the official source before you act.