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 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 is a typical factoring rate?
Average factoring rates vary somewhere between 1 and 6 percent. 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. Sometimes, however, factoring companies charge hidden fees on top of this.
What are factoring fees?
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. Also known as a wire fee.
- Application fee. A flat or percentage fee that’s highly variable.
- Invoice processing fee. A fee charged for getting your unpaid 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 on a monthly basis and you don’t meet the minimum, you could end up paying this fee.
- Termination fee. Again, this applies if you signed a factoring agreement or long-term contract and want to end it early.
It’s easy to see how hidden fees can add up over time, making it important to ask any factoring company you’re considering about their average accounts receivable factoring rates and any additional fees.
To give you our perspective, FundThrough’s current invoice factoring rates depends on your individual circumstances. Our invoice factoring rate is 2.75 percent per 30 days. We don’t charge any hidden fees. Because we believe in transparency, we clearly communicate your total cost of invoice factoring before you fund, so you can make an informed decision. See our pricing page for more on what you can expect to pay for invoice funding.
What determines invoice factoring rates?
Invoice factoring rates depend 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 you will for an invoice with Net 60 terms (provided your customer pays on time.)
- Size of the invoice. Some factors charge lower fees for larger invoices.
- Who your customer is. Their creditworthiness (and credit risk) can have an impact on your receivables factoring rates.
- 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.)
Factoring Fee Types
There are several ways invoice factoring companies charge for their factoring services, including flat rate, variable rate, and prime plus margin fee (a type of variable pricing). We’ll explore them below, so you have a better understanding of common factoring rate structures, and how to get the best invoice factoring rates for your needs.
The difference between flat rate vs tiered rates (aka variable invoice factoring rates)
A flat factoring 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.
Tiered factoring rates, also known as variable invoice factoring 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 2.75% per 30 days. The cost of factoring is deducted from your advance and is based on when the invoice will be paid:
1-30 days = 2.75% • 31-45 days = 3.75%
46-60 days = 5.5% • 61 days and up = 8.25%
Prime plus margin invoice factoring rates
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 an invoice factoring rate of 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.
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Invoice Factoring Rate Examples: Flat vs Tiered vs Prime Plus Margin
Let’s go over an example of factoring an invoice using the different ways factoring companies structure their factoring fees to give you an idea of what to expect with different fee structures.
Flat rate factoring fee example
Say you factor a $100,000 invoice that’s due in 60 days. The factoring company charges you a flat rate of 5% in order to factor your invoice. This means that you get an advance for $95,000, and pay a $5,000 invoice factoring fee. With flat rate factoring, you would be charged the same amount (in this case, 5%) even if the invoice due date was 30 days or 90 days, or, if the invoice was twice as big.
Tiered factoring fee example
Let’s use the same example of factoring a $100,000 invoice that’s due in 60 days. With tiered factoring the factor charges you different interest rates for different periods of time the invoice is outstanding. So say the factoring company charges 2.75% for 30 days and 5.5% for 60 days. Within a few days of factoring the invoice, $94,500 hits your account. If the invoice had been due in 30 days, the factor would’ve only withheld $2,750, instead of $5,500.
Prime plus margin rate fee example
Taking once again the example where you factor a $100,000 invoice that’s due in 60 days. In this scenario, the factoring company charges 5.5% for 60 days, plus the prime rate that day of 3 percent that applies to your entire invoice total (not just the advance rate). Your rate comes out to 8.5%. This means you end up paying $8,500 for a total advance of $91,500.
Invoice factoring cost vs invoice factoring rate
Invoice factoring costs and invoice 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, and varies among invoice factoring providers.
If you’re considering several factoring companies, be sure to ask them what your total invoice factoring cost will be (not just their invoice factoring rates) and have them break it down for you before you agree. The lowest rate might not be the most affordable in the long run by the time you add in additional charges and service fees.
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 invoice 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.
Factoring Rate Comparison
As you might expect, different companies offer different factoring rates. It can be challenging keeping everything sorted when comparing factoring fees. We’ve gone ahead and done the work for you to compare FundThrough’s invoice factoring rates, along with a few other important data points, with some other factoring companies, to hopefully make the process as simple as possible.
Invoice Factoring Rates FAQs
Your questions answered.
Is invoice factoring risky?
The short answer is that if your customers are creditworthy and pay their invoices reliably, any risk involved with invoice factoring is very low. If you’re factoring with recourse, you’re still on the hook for an unpaid invoice that you’ve advanced. However, most factoring companies will work with you to come to a fair solution.
Do banks factor invoices?
No, banks don’t factor invoices. Banks are in the business of lending money. Banks do, however, offer different types of financing that can be complementary to factoring (if you can qualify and have time to go through the process).
Is invoice factoring considered a loan?
Nope! That’s one nice thing about factoring: it’s not debt. You’re simply getting an advance on work you’ve already done. You don’t have to pay your advance back because your customer just pays their invoice to the factoring company. Once that happens, there’s no further commitment.
What Is Invoice Factoring?
Invoice factoring is a form of financing where a business owner sells outstanding invoices to a factoring company for fast access to funds. The business owner receives cash for the invoice amount, usually less any fees, ahead of the payment terms. The business owner’s customer, who is responsible for paying the invoice, instead pays the invoice amount to the factoring company according to the original payment terms.
Invoice factoring also goes by the terms accounts receivable factoring or receivable financing.
Why Factor Invoices?
B2B businesses use invoice factoring for different reasons. Your company should consider making use of an invoice factoring solution if:
- Banks have turned you down for a business loan or line of credit, or you don’t want to be tied up in traditional bank loans or lines of credit.
- You need a quick boost of cash flow – in a few business days, rather than a few months.
- If you need reliable access to cash flow for paying daily expenses and/or fueling business growth.
- You’re a startup company without much credit history yet. In many cases, invoice factoring doesn’t require a credit check or high credit score because it relies on the credit rating of your customers. Even businesses with bad credit can still often qualify for invoice factoring.
- You have slow-paying customers. Many customers insist on 30, 60, and even 90 day net terms, which means you’re without payment for months, for work you’ve already completed.
- You want more time to focus on your business instead of chasing down late payments and managing your A/R.