Factoring companies make money by charging a factoring fee, which they either calculate based on the number of days a factored invoice is outstanding or as a flat rate per invoice. In some cases, invoice factoring includes additional fees designed to encourage borrowers to factor a certain number of invoices or to maintain an open credit facility.
Flat vs Variable Factoring Fees
Most factoring companies work with variable fees. Factoring companies may base the fee on the number of days, weeks, or months the invoice is outstanding. In some cases, as the invoice matures, the timeframe also shifts. For example, an invoice may have a monthly fee for the first 30 days, followed by a daily fee for the remaining time.
Tip: If your business is offered a variable fee, it’s always advantageous to get the smallest time increment possible. For example, if you’re charged a monthly fee, and your customer repays the invoice in 20 days, your business will still be charged for the full month.
Some new factoring companies offer a flat factoring fee. A flat factoring fee is the same regardless of the amount of time that an invoice is outstanding. For example, a factoring company may charge a 1% fee regardless of when an invoice is repaid—in 10 days or 60 days—which makes it less expensive if the invoice is outstanding for longer.
Tip: If your customers pay invoices unpredictably or you are factoring individual invoices without a contract, then a flat factoring fee can be a more cost-effective and predictable solution for you.
What Factoring Fees Small Business Owners Can Expect
In addition to the factoring fee, some factoring companies include other fees in their contracts. In some cases, there’s an origination or a draw fee. These fees are primarily charged when the facility is opened, and the limit is established. For example, if a customer receives a $1 million factoring facility, the factoring company may charge a 1% fee of $10,000 before any invoices are factored.
Other factoring companies include monthly fees in their contracts. These monthly fees are charged on an ongoing basis while the factoring facility is open. Usually, these fees are not based on the size of the facility but are flat fees instead, similar to a bank account minimum balance fee. Some factoring companies encourage customers to use the factoring facility by reducing the fees if they factor above a certain volume of invoices.
Most factoring companies also include minimum factoring fees. When a contract is set up, a factoring company will require that at least a certain dollar amount of invoices be factored every month while the facility is open. Failing to factor a sufficient number of invoices will result in these fees.
Tip: If you are looking to avoid a monthly fee or are unsure if you can commit to factoring a certain number of invoices every month, the solution you need is called spot factoring.
Factors That Influence Factoring Fees
While contractual fees like origination fees and minimum factoring fees tend to be standard across all customers for a specific factoring company, individual factoring fees vary based on the perceived level of risk. Lenders evaluate the riskiness of a borrower by looking at the creditworthiness of customers, the number and size of the invoices, and the history of invoice payments.
Tips for Minimizing Factoring Fees
To minimize factoring fees, your factoring application must appear less risky to the lender. Therefore, you should factor invoices from creditworthy customers with whom you have an established history of collecting payments from and who typically pay on time. You can also reduce your factoring fees by bringing a factoring company a large volume of invoices, which will help it offset some of the perceived risks.
Small business owners that receive an offer from a factoring company should evaluate the fees in their contract closely. Some of those fees will be related to each individual invoice and will either be flat or variable across different time intervals. Other fees will be constant for any customer of the company and will be related to keeping the facility open and active.