Factoring pricing is not standardized. Two offers with the same headline rate can cost very different amounts once you add time, fee timing and extra charges. Here is how to read the numbers.
Rates are quoted per client. They depend on your monthly volume, your customers' credit, your industry and how long your customers take to pay. Nothing in this chapter is a quote.
Flat vs. tiered fees
Flat fee
A flat fee is a single percentage charged on each invoice, no matter when the customer pays within an agreed window. It is simple to predict. If your customer pays very quickly, though, you pay the same fee as if it paid at the end of the window.
Tiered or time-based fee
A tiered fee grows the longer the invoice is unpaid. For example, the agreement might charge one rate for the first 30 days, then an added amount for each extra 10 or 15 days.
Time-based fees reward fast-paying customers. They punish slow ones. If your customers often pay late, model that scenario before you sign.
Daily or prime-based pricing
Some agreements charge interest-style pricing on the money actually advanced, often tied to a benchmark rate plus a margin. This looks more like a credit line. It can be easier to compare with bank financing.
What the fee is charged on
Always check whether the fee applies to:
- The face value of the invoice, or
- Only the amount advanced
A fee on face value costs more than the same percentage on the advance.
How advance, fee and reserve fit together
The advance, the reserve and the fee are three slices of the same invoice.
- Advance: cash you get now
- Reserve: the amount held back until your customer pays
- Fee: taken out of the reserve when the invoice is settled
- Rebate: what is left of the reserve, paid to you at the end
A worked example (illustrative numbers only)
The numbers below are illustrative only. They are not quotes and do not describe what any factor charges. Your terms will differ.
Assume:
- Invoice amount: $10,000
- Advance rate: 90%
- Fee: 3% of face value for the first 30 days, plus 1% for each additional 15 days (illustrative)
Step 1. The advance. You receive 90% of $10,000 = $9,000. The reserve is $1,000.
Step 2. Customer pays in 30 days. The fee is 3% of $10,000 = $300. Your rebate is $1,000 − $300 = $700. In total you receive $9,000 + $700 = $9,700.
Step 3. What if the customer pays in 45 days? The fee is 3% + 1% = 4%, or $400. Your rebate is $1,000 − $400 = $600. Total received: $9,600.
Step 4. What if the customer pays in 60 days? The fee becomes 5%, or $500. Rebate: $500. Total received: $9,500.
The slower your customer pays, the less you keep. Try your own numbers in our factoring calculator.
Additional fees to look for
The factoring fee is rarely the only charge. Common extra fees include:
- Application or setup fee: charged when the account is opened
- Due diligence fee: covers lien searches, background checks and credit reports
- Wire fee: charged per wire transfer
- ACH fee: usually lower than a wire, but may still apply
- Invoice processing or service fee: charged per invoice or per batch
- Customer credit check fee: charged when you add new customers
- Minimum volume fee: charged if you factor less than an agreed amount
- Misdirected payment fee: charged if your customer pays you instead of the factor
- Early termination fee: charged if you leave before the term ends
- Lockbox or bank fees
Ask for a complete fee schedule in writing. Any fee not in the agreement should not be charged.
Estimating the effective annual cost
Factoring fees are quoted per invoice period, not per year. To compare factoring with other financing, convert the cost to an annual figure.
A simple method
Using the illustrative 30-day case above:
- Fee: $300
- Money you actually used: $9,000 (the advance)
- Cost per period on money used: $300 ÷ $9,000 = about 3.33%
- Periods per year: 365 ÷ 30 = about 12.2
- Approximate annual cost: 3.33% × 12.2 = about 40.6%
This is a rough, simple-rate estimate using illustrative numbers. It ignores compounding and extra fees. Adding wire fees or service fees would raise it.
Why this matters
A fee that looks small per invoice can be a high cost on an annual basis. That does not make factoring a bad choice. It may still be worth it if it lets you take on work you would otherwise turn down, or avoid late payment penalties. But you should know the number.
Tips for comparing offers
- Use the same invoice, the same advance and the same days-to-pay for every offer.
- Include every fee you expect to pay in a typical month.
- Model a slow-pay case, not just an on-time one.
- Ask whether partial periods are charged as full periods.
Frequently asked questions
Why can't I find a standard factoring rate?
There isn't one. Rates are quoted per client and depend on volume, customer credit, industry and days outstanding. Anyone quoting a rate before learning about your business is giving a rough guess at most.
Is a lower fee always cheaper?
No. A lower fee with a lower advance, a longer fee period, more add-on fees or a high minimum can cost more overall. Compare total dollars on the same invoice.
Does the fee include the reserve?
No. The reserve is your money held back until the customer pays. The fee comes out of it, and the rest is returned to you as the rebate.