Understanding Invoice Factoring Rates & Fees

invoice factoring rates fees

Invoice factoring is perhaps one of the most convoluted types of financing available to merchants. Because factoring involves many different parties and has a lot of moving parts, rates and fees can be difficult to parse. Nonetheless, having a good understanding of rates and fees will ensure that you’re working with the best invoice factor for your business.

So here’s a rundown of all the important things you need to know to ensure you’re getting the best deal for your business, from the factors that affect your rates and fees, to factoring fee structures, to other fees you might have to pay.

Invoice Factoring Basics

Before we get into the fees, let’s go over the basics of invoice factoring.

Quite simply, invoice factoring is a financial transaction in which you sell an unpaid invoice to a factoring company at a discount in exchange for immediate cash. Typically, the factoring company will advance you a percentage of the unpaid invoice, and hold the rest in reserve until your customer has paid. When your customer pays, the factor will send the reserve, less the factoring fee, along to your business.

Naturally, in addition to the factoring fee, you may also be beholden to additional fees. I cover the most common below.

In practice, factoring can take on many variations. You might be required to sign long-term contracts, re-purchase the invoice in the event of non-payment, sell a certain number of invoices per month, or other requirements. Read our guide to invoice factoring basics for more information.

Factoring fees are deducted from the reserve, but how does the factor decide how much to charge you? There are a lot of elements that go into that decision, but here are the biggest ones:

Things That Affect Your Rate

Invoice factors take many elements into consideration when deciding what rate to assign your business. Here are the most important business characteristics your factor will look at:

Industry

Businesses in industries considered more unstable and risky will typically be assigned higher rates. Some of this can be mitigated by finding a factor that is familiar with your specific industry. For example, a business in the construction industry (an industry typically considered high-risk) might want to find a factor that specializes in construction financing, even if they qualify for services from a factor that provides a more generalized service.

Businesses in very high-risk industries, such as the medical industry, may have to find a specialized factor, as many general invoice factors will not work with them.

Customer Creditworthiness and Stability

Because invoice factoring is dependent on your customers paying their bills, the cost of factoring is very dependent on how creditworthy and stable your customers are. If you work with reliable, creditworthy customers, you will likely qualify for lower rates than if you work with customers who are not as creditworthy.

Your Creditworthiness and Stability

Although your customer’s creditworthiness is more important, invoice factors want to know that your business is stable as well. Businesses with long and stable credit histories will qualify for lower rates.

Invoice Volume and Size of Invoice

In short, the less work the factor has to do, the lower your rates will be.

Customers who process fewer, larger, invoices will qualify for lower rates because the factor doesn’t have to process as many invoices. Similarly, customers that are processing a high volume of invoices will qualify for lower rates because the factor puts in less work relative to how much they’re making in return.

Relationship with the Invoice Factor

You will begin to qualify for lower rates as you continue to sell your invoices to the factor. As the company becomes familiar with your business and customers–and it becomes less work to service your business–they may be able to lower your rates.

Common Factoring Fee Structures

Invoice factors typically structure fees in a few different ways. More commonly, factors might calculate your fee on a tiered factoring fee or a flat fee basis. However, you may also come across a prime plus fee structure.

Tiered Factoring Fee

A tiered factoring fee is probably the most common type of factoring fee. Factors that charge a tiered fee will charge a fee per days outstanding. Typically, the fee is accrued on a monthly, weekly, or daily schedule. Alternatively, some factors calculate the fees in blocks of 10 or 15 days.

A typical tiered factoring fee arrangement on might look something like this:

  • Invoice value: $10,000
  • Advance rate: 90% ($9,000)
  • Factoring fee: 1.8% per month
  • Fee schedule:
Days 1 – 30$180
Days 31 – 60$360
Days 61 – 90$540

In the above example, the merchant would receive $810 of the reserve if their customer paid within 30 days, $620 if their customer paid within 60 days, and $430 if their customer paid within 90 days.

Although most factors quote you a monthly rate, they may still calculate the fee on a weekly or daily basis. Rates that are calculated on a daily or weekly basis (or in blocks of a certain amount of days) may offer the opportunity for more savings; if your customer pays close to the start of a new tier, you are not paying for additional, unused, days.

For example, here is a comparison between a factor that calculates the fee on a 30 day basis (Factor A) and one that calculates the fee on a daily basis (Factor B), using the stats above. For brevity, the days go in increments of 5.

Factor A
(30-day basis)
Factor B
(Daily basis)
Day 1$180$6
Day 5$180$30
Day 10$180$60
Day 15$180$90
Day 20$180$120
Day 25$180$150
Day 30$180$180
Day 35$360$210
Day 40$360$240
Day 45$360$270
Day 50$360$300
Day 55$360$330
Day 60$360$360

As you can see, merchants may benefit from additional savings if fees are calculated more frequently. On the chart above, for example, the fee would be $120 less from Factor B if the customer paid on day 40 (only $240 as opposed to $360).

Flat Fee

The second most common type of factoring fee, the flat fee, is the easiest to understand.

Factors that charge a flat fee simply charge a percentage of the invoice; the fee will not typically change, regardless of how long your customer takes to pay the bill.

A flat fee on a $10,000 invoice might look something like this:

  • Invoice value: $10,000
  • Advance rate: 90% ($9,000)
  • Flat fee: 4%
  • Fee schedule:
Days 1 – 30$400
Days 31 – 60$400
Days 61 – 90$400

In this scenario, you’d get $600 back from the reserve, whether your customer pays on day 1 or on day 90.

Flat fees tend to be more commonly offered for businesses in the trucking and transportation industries, but may be offered to businesses in other industries as well.

Prime Plus

Prime plus factoring is not as commonly used anymore, but you may come across a factor or two that still use this fee structure.

Prime plus uses the prime rate (the interest rate banks charge their most creditworthy customer) plus a little extra to calculate your fee. For example, you might be offered a rate that is “prime + 3.5%.”

Currently, the prime rate is 4%, so your rate in the example above would be 7.5% per year. However, the prime rate may change. If so, your factoring rate would change as well.

If you sell an invoice and you have a rate of prime + 3.5%, the deal might look something like this:

  • Invoice value: $10,000
  • Advance rate: 90% ($9,000)
  • Factoring rate: Prime + 3.5% (total 7.5%, or 0.02055% per day)
  • Fee schedule:
Day 1$2.05
Day 10$20.55
Day 20$41.10
Day 30$61.64
Day 40$82.19
Day 50$102.74
Day 60$123.29
Day 70$143.84
Day 80$164.38
Day 90$184.93

Much like an installment loan, interest is simply accrued every day until the loan is repaid. The earlier your customer pays, the more money you save. In the example above, you will receive a reserve of about $938.36 ($1000 – $61.64) if your customer pays on day 30, or a reserve of about $815 ($1000 – $184.93) if your customer waits until day 90 to pay.

Which Structure is Best?

All three structures (or even hybrids of the structures) are more-or-less commonly used, because the ideal structure is very business dependent. The best structure for your business will depend on your industry, the size and age of your invoices, how long your customers take to pay invoices, and other factors.

Other Fees to Watch Out For

Like any other type of financing product, invoice factors may charge additional fees to cover the costs that might occur in a financial relationship. No two factors (and no two clients) are the same, so your fees will vary depending on your business and your factor.

Nonetheless, it’s important to be aware of common fees that you may encounter, as they might drive up the cost of the service. Here are the most common fees charged by invoice factors.

Application and Startup Fees

Quite simply, some factors charge fees to cover the cost of evaluating your application and/or setting up the financial arrangement. Many factors waive these fees until you factor your first invoice, but some may charge an application or startup fee up-front.

Servicing Fees

Servicing fees are typically charged on a monthly basis, but could be charged at other intervals as well. These are usually catch-all fees used to cover any and all costs associated with keeping your account current.

This fee might instead be called an Administration or Maintenance Fee.

Invoice Processing Fees

This fee is used to cover the costs incurred while processing your invoices, such as running credit checks and maintaining records.

ACH and/or Bank Wire Fees

There are a few different ways to transfer funds between banks, including automated clearing house (ACH) and bank wire. Factors may charge a small fee for these services. Because a bank wire is faster but more expensive, you’re more likely to come across a bank wire fee than an ACH fee, but some factors charge for both.

Monthly Minimum Fees

Some factors may require that you’re factoring a certain amount of invoices per month. If you don’t meet that minimum, they’ll charge a fee to make up the difference.

Early Termination Fee

If the invoice factor requires a contract, it typically ranges from 6 – 18 months. If you need to cancel the arrangement for some reason, you will have to pay a fee to get out of the contract.

Side note: not interested in committing to a long-term contract? Perhaps spot factoring is what you’re looking for.

Are Extra Fees Bad?

As long as the factor is up-front about extra fees, they are not necessarily a bad thing. Regardless of the way they’re charged, you will have to pay for services such as account maintenance, invoice processing, and money transfers; instead of charging additional fees, some factors may simply roll all these costs into your factoring fee.

Whether or not an arrangement with extra fees is best for your business must be evaluated on a case-by-case basis.

Final Thoughts

Invoice factoring rates and fees can be a confusing topic, but understanding the basics will help you find the perfect factoring partner for your business. When in doubt, get a quote from a few different factors to compare rates or talk to a financial adviser with invoice factoring experience.

Ready to start looking for an invoice factor? Check out a comparison of some of our favorite factors, our full list or reviews, or our other blog posts on this topic.

Bianca Crouse

Bianca Crouse

Bianca is a writer from the Pacific Northwest. As a product of the digital age, she likes absorbing large amounts of information and figures she might as well pass it on. When not staring at a screen, she is probably foraging for food outside, playing board games, or harassing somebody with theories about that movie she just watched.
Bianca Crouse
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