If you’ve ever shopped for any kind of business funding, one of the first questions you’ll have is about the rates. You have to know what you’ll pay to borrow money (or in the case of invoice factoring, having your cash now as opposed to 30 days or more) and evaluate whether you’re getting a fair price and if that price is provides enough value.
That’s why we’re diving into everything you need to know about invoice factoring rates in this post. You’ll find answers to common questions, enabling you to accurately weigh any offer you get from a factoring company.
What are Factoring Fees?
The main factoring fee is called the discount rate. This is the amount of money that the factoring company withholds from the invoice total as their payment for advancing cash and waiting to get paid for you. You can expect to pay somewhere between 1 and 5 percent. Sometimes, however, factoring companies charge hidden fees on top of this.
The fees you can expect vary between companies. In addition to the percentage a factor keeps, sometimes there are hidden fees to watch out for:
- ACH fee. This is the fee for the factor’s bank wiring funds to your account, passed on to you.
- Application fee. A flat or percentage fee that’s highly variable.
- Invoice processing fee. A fee charged for getting your invoices processed in the back office.
- Closing fee. An additional amount the factoring company keeps from the invoice
- Monthly fee. If you sign a contract requiring that you sell a certain portion of your invoices each month and you don’t meet the minimum, you could end up paying this fee.)
- Termination fee. Again, this applies if you signed a contract and want to end it early.
It’s easy to see how hidden fees can add up over time, making it an important question to ask any factoring company you’re considering.
To give you our perspective, FundThrough’s fees depend on the funding option you choose. Velocity invoice factoring is typically 2.5 percent to 5 percent. Express invoice financing is typically 6 percent. We don’t charge any hidden fees. See our pricing page for more on what you can expect to pay for invoice funding.
What Determines Invoice Factoring Rates?
Invoice factoring rates depends on the company and how they charge for advancing your invoice. Some of the factors that can influence the final price include:
- The invoice terms. You’ll pay less for an invoice with Net 30 terms than Net 60 (provided your customer pays on time.)
- Size of the invoice. Some factors charge lower fees for larger invoices.
- Who your customer is. Their creditworthiness can have an impact.
- Industry. Some factors will charge more for industries that seem higher risk. (It’s often helpful to look for a factoring company that specializes in your industry, whether that’s factoring for oil and gas or other industries that use factoring.)
Different Ways Companies Can Charge
There are several ways factoring companies charge for their service, including flat rate, variable rate, and prime plus margin fee (a type of variable pricing). We’ll explore them below.
Flat Rate vs. Variables Invoice Factoring Rates
A flat rate is exactly what it sounds like. The factoring company charges a flat percentage for every invoice. After you’ve paid that price up front, you don’t pay anymore for as long as the invoice stays open.
Variable rates are more complicated. Typically the factor will take a percentage of the invoice for as long as it goes unpaid. The upside is that if your customer pays promptly, you might save money with a variable rate. Here’s an example based on our own pricing, which is typically 2.5% – 5%. The cost to skip payment terms using Velocity Invoice Factoring is deducted from your advance and is based on when the invoice will be paid:
1-30 days = 2.5% • 31-45 days = 3.75%
46-60 days = 5% • 61 days and up = 7.5%
Another model you’ll find sometimes is prime plus margin fee. In this style of pricing, the factor uses the prime interest rate (whatever it is that day) and they charge you a percentage on top of that. So if the prime rate is 3.25 percent + 2 percent discount rate, you’d be charged 5.25 percent. Unless the prime rate only applies to your advance rate. Some factors only advance a certain portion of the invoice, say 80 percent, and will only forward the rest when the invoice (less the discount rate) is paid.
Factoring Cost vs. Factoring Rate
Factoring cost and factoring rates are not the same thing, and they’re an important distinction to make so that you don’t get sticker shock. The invoice factoring rate refers to that discount rate, the percentage the factoring company keeps from your invoice as payment for their services. It’s straightforward. But your actual factoring cost is highly individualized. It will include your rate plus any hidden fees.
If you’re considering several factoring companies, be sure to ask them what your total factoring cost will be (not just your rate) and have them break it down for you before you agree. That’s the approach FundThrough takes – we show you your complete pricing upfront so that you can decide whether it works for you before you factor. We also don’t charge hidden fees; what you see is what you get. And while many factoring companies will only advance 80 percent of an invoice, we advance the full invoice amount (less the discount rate). It’s part of our approach to ensuring transparency so that there are no surprises.