How to Calculate Factoring Costs

invoices and a calculator on a desk

Your business has several options when it comes to securing funding: the bank, an investor, a loan, factoring, etc. When trying to decide which is best for your business, the decision is often made based on how easy the funding is to get, how secure the funding method is and how much it costs. We understand factoring can be a bit confusing for some, so we’ve compiled a list of frequently asked questions to help you figure out how to calculate factoring costs.

Let’s start with the basics.

What is invoice factoring?

Invoice factoring is the process of selling your unpaid invoices to a factoring company in exchange for a cash advance. Invoice factoring can help bridge the gap between payment periods, provide funding without debt and can be used as either a short-term or long-term financing option.

Factoring is the quick, easy funding solution for new small businesses, those with seasonal cash flow fluctuation and those with less-than-perfect credit.

How does factoring work?

Factoring works like this:

  1. Serve your customers – You provide goods and/or services to your customers as usual.
  2. Submit invoices—Submit the invoices you wish to factor.
  3. Factoring Company Verifies the invoice – The factor verifies that your product or service was delivered and/or performed.
  4. Receive a Cash Advance – The factoring company advances you the cash within 24 hours.

Factoring Fees & Rates

What are factoring costs?

Factoring costs primarily come from factoring rates. Factoring rates are small percentage fees that pay for the cash advance. Most factoring rates fall between 1 and 5%, and pay for several services beneficial to businesses.

Occasionally, there may be a factoring fee or two depending on your business’ factoring preferences. Examples include a due diligence fee or a money transfer fee.

Are there different kinds of rates and fees?

Yes, there are different kinds of factoring rates and fees.

A variable rate is a fee structure based on how long it takes your client to pay back the invoices the factoring company purchased. The longer the invoices go unpaid, the more your company will pay in fees.  For example, you may have a variable rate where you pay a 2% fee for the first 30 days of factoring. After that, you’ll have to pay an additional, small fee based on how long the invoice is unpaid. Taking the example above, after the initial 30 days, you may incur a 0.5% fee on your invoices for every 10 days they go unpaid.

A flat rate is a fee structure where there is a one-time fee charged up front. The fee will stay the same regardless of how long the invoice(s) go unpaid. This option is mostly used in the trucking industry.

These are just examples.  Many factoring companies are willing and able to work with your company to find the best factoring option for you.

What do factoring fees pay for?

Factoring fees, in addition to providing access to fast capital, pay for several things.

  • Administrative Support – If your company so chooses, certain factoring companies can provide back-office functions for your business. Examples include performing credit and/or background checks, making collections calls and running online reporting.
  • Flexibility – Unlike a credit line or bank loan, invoice factoring allows you to access your capital when you need it. Factors can also easily provide more funding for your business as your need grows.
  • Assistance – There are many factoring companies out there, and some are more reliable than others. Factoring costs help pay for the account managers who help your business navigate factoring paperwork, answer your questions and make your factoring experience as smooth as possible.

How do I figure out the cost of factoring?

The first step in how to calculate factoring costs, you must take into consideration both factoring fees and rates.

You also need to figure out what rate structure your factoring company is using – flat or variable rates.                                                                         

Factoring rates may vary, but can be approximated by answering these questions:

  • What is the volume of the monthly receivables you want to factor? – Larger monthly amounts often mean lower fees, since many factoring companies offer volume-based discounts.
  • Are you considering factoring for a short-term or long-term funding solution? – Long-term funding almost always means lower fees.
  • What is your industry? – Different industries come with different levels of implied risk, meaning some industries are automatically going to get lower factoring fees than others.
  • How creditworthy are your customers? – The more reliable they are, the lower your rate. If they aren’t creditworthy debtors, the costs go up.
  • How long does it take your customers to pay? – The longer, the higher the cost. This is because longer contracts can be riskier for factors to fund.

Most factoring rates are between 1-5% of the cost of your invoice but can vary. Costs for large volume deals and invoices with well-paying clients (like the government or a big-box store) skew lower than higher. Knowing how to calculate factoring costs means knowing approximately how much your average invoice is, who your debtor is, and understanding industry-specific measures.

Discounts are also provided for the faster your clients pay the unpaid invoices.

Example 1: A non-trucking B2B business starts working with a factoring company. Their contract states the factoring company charges a 2% fee for the first 30 days of the factoring contract, after which smaller fee (say, .5%) is added on every 10 days past the initial 30 that the invoice(s) remain unpaid.

Example 2: An owner-operator is looking to solve their cash flow problems and decides to work with a factoring company. Their factoring company offered the owner-operator a flat rate- a 97% cash advance with a 3% fee.

Be mindful of the fact that recourse and non-recourse factoring often have different average rates that are parallel to the level of risk the factoring company is taking in funding the invoice(s).To learn more, check out our page that explains the difference between recourse and non-recourse factoring.

A much easier way to find out what factoring would cost your businesses is to give us a call or fill out an online form. Our factoring specialists can give you a free quote fast- just answer a few simple questions. If you decide factoring isn’t for you, no problem. We are here to help you make the best decision for the health of your business.

What do I need to get started?

Here are a few things you need to factor.

  • A B2B business
  • A factoring application (Fill out an online application here)
  • An accounts receivable aging report
  • A copy of your Articles of Incorporation
  • Invoices to factor
  • Credit-worthy clients
  • A business bank account
  • A tax ID number
  • A form of personal identification

Depending on your industry and your business’ needs, this requirements list may grow or shrink. Count on always needing a factoring application and unpaid invoices.

How do I begin?

To begin, simply fill out an online form or give us a call. One of the toughest aspects of factoring is finding the right funder for you, but thankfully that is where Factor Finders comes in. With a little bit of information about your business and its needs, we can match you with one of our reliable, long-time funding partners who can best serve you.

If you’re interested in factoring but aren’t fluent in how to calculate factoring costs, we can give you a free, no-obligation quote.

Working with Factor Finders saves you time, and every business owner knows that time=money. Plus, our services are free to you. What are you waiting for?

Ready to get started?