Glossary · pricing

Risk-based pricing

Also called risk-adjusted pricing, tiered pricing.

Setting the price of an offer from the assessed risk of the specific file - credit, operating history, deposit stability, industry, position - rather than from a posted rate.

Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.

What it means

Every funder in this market prices this way. A model or an underwriter scores the file, maps it to a tier, and the tier produces a factor rate or interest rate, a term, a maximum amount and a payment frequency. Position and existing debt service usually move the price more than the owner's credit score does.

Three things beyond your file also move the number, and none of them are about you: the funder's cost of capital, its current appetite and concentration in your industry and state, and - on brokered deals - the spread the broker adds over the buy rate.

For credit transactions, the Equal Credit Opportunity Act and Regulation B impose requirements on business credit applicants, including notification of action taken, with the specifics varying by applicant revenue size. The Consumer Financial Protection Bureau's small business lending data rule adds collection and reporting obligations as it phases in. Whether and how these reach a particular transaction depends on how the product is characterised and on the funder's size.

Where this one catches people

The price you are quoted reflects the funder's model and its appetite this month as much as it reflects your business, which is why the same file shopped properly produces a wide spread of offers. On brokered deals, part of the difference between the funder's buy rate and your rate is broker compensation rather than any assessment of risk at all. The first offer is a data point, not a valuation.

Where you will meet this term

Merchant Cash Advance Working Capital Term Loan Business Line of Credit Equipment Financing

Read next

Buy rateThe price the funder is willing to fund at, before the broker's markup, with the gap between it and the rate … Factor rateA multiplier applied to the funded amount that fixes the total dollars to be remitted. It is a price, not a r… MarginThe fixed spread a lender adds to a published index such as prime or SOFR to arrive at the interest rate on a… Paper gradeThe informal tiering funders and brokers use to sort files by quality, from bank-eligible A paper down throug… PortfolioThe set of live deals a funder, ISO or investor holds, and the aggregate performance data on it that drives w… PositionWhere a funder sits in the order of advances or liens against the same business - first position funded first… Qualification criteriaThe published floors a funder applies before a file is properly reviewed - time in business, monthly revenue,… Rate sheetThe funder's pricing grid distributed to brokers, showing buy rates, terms, maximum funding and commission po…

Risk-based pricing — common questions

What does risk-based pricing mean?

Setting the price of an offer from the assessed risk of the specific file - credit, operating history, deposit stability, industry, position - rather than from a posted rate.

Where does risk-based pricing catch people out?

The price you are quoted reflects the funder's model and its appetite this month as much as it reflects your business, which is why the same file shopped properly produces a wide spread of offers. On brokered deals, part of the difference between the funder's buy rate and your rate is broker compensation rather than any assessment of risk at all. The first offer is a data point, not a valuation.

Is risk-based pricing the same as an interest rate?

Risk-based pricing is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.

Which products does risk-based pricing apply to?

Merchant Cash Advance, Working Capital, Term Loan, Business Line of Credit, Equipment Financing.

Is there a worked example of risk-based pricing?

Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.

What else should I read alongside risk-based pricing?

Buy rate, Factor rate, Margin, Paper grade, Portfolio.

Has this definition been checked?

Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.

Is this legal advice?

No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.

Can I suggest a term?

Yes — [email protected]. The glossary grows from what people are actually shown in contracts.