The best way to figure out the cost of factoring invoices is to work directly with an invoice factoring provider. Most will charge a discount rate and several fees to ensure they are compensated adequately for the risk they take by providing funding. By understanding the fees and estimating potential costs, small business owners can determine if invoice factoring is the best solution for them.
Cost of Factoring Overview
1% to 3% per month
Up to $1,000
$50 to $1,000
Up to $1,000
$50 to $250
Wire Transfer Fee
$15 to $25
Besides these direct costs, there is an indirect cost of capital related to the advance rate. A low advance rate results in less money upfront, which increases the overall cost of capital since your business has access to the money for less time. The complexity of calculating the impact of the advance rate makes it less relevant to factoring costs since it doesn’t directly reduce the amount of money a business receives.
Invoice Factoring Discount Rate
The discount rate is the central cost of factoring, and it’s charged either as a flat fee or on an ongoing basis. Most factoring companies have one rate for the first 30 days after a company has been invoiced, usually between 1% and 3%. The rate is subsequently charged in weekly or daily increments for the remainder of the invoice life.
Tip: For rates based on the time an invoice is outstanding, the smaller the increment and lower the rate, the better. The smaller increment is important so that your business doesn’t pay for days that the invoice was not outstanding.
The discount rate also can be a flat rate, which is charged regardless of the time an invoice is outstanding. While this is rarer, new factoring companies offer this option to small business owners.
Tip: If your small business is offered a flat rate, you should consider when the invoice will be repaid. If the invoice is repaid quickly, you may want to shop around for a variable rate because the flat rate will usually be a worse deal. If the invoice may take a long time, or you are unsure, then a flat rate offers greater predictability.
Invoice Factoring Fees
Invoice factoring contracts sometimes include origination, maintenance, termination, and performance fees. While these are not universal, they do represent a significant portion of invoice factoring costs for a small business. These costs are difficult to estimate, but a good rule of thumb is to assume that you will incur each penalty at least once per quarter.
- Origination fees: This flat fee is charged at the start of the factoring relationship and typically is used by the factoring company to cover debtor research costs. It can range from $50 to $1,000 depending on the number of invoices and the complexity of the transaction.
- Maintenance fees: This flat or percentage fee is charged on a regular basis while the account is kept open. It helps the factoring company ensure there are sufficient reserves to maintain the loan. It ranges from $50 to $250 or from 0.1% to 0.5% of the maximum loan.
- Termination fees: This is the rarest fee in invoice factoring, and it only appears on contract factoring accounts that terminate a relationship early. It can be as much as $1,000, and there are usually clauses that allow either party to exit the contract without paying the fee.
- Performance fees: These fees can be measured by commissions or total factoring volume and typically are implemented to ensure the factoring company can retain a certain level of earning. A company that factors less than the minimum amount may need to pay a flat fee up to $1,000, and a company that underperforms on commissions may need to pay up to 25% of the commission shortage for a particular month.
- Wire transfer fees: This is a standard fee of $15 to $25 that factoring companies charge when transferring funds into a bank account. In most cases, any direct transfer that can take up to a day is free. Only businesses that anticipate needing an instant transfer should include this fee in their estimates.
Example of Invoice Factoring Costs for a Business
A small business factors a $10,000 invoice with a factoring company at an advance rate of 90%.
- The business receives $9,000
The invoice is outstanding for 30 days at a discount rate of 1%.
- The remaining value of the invoice is $900.
The business maintains its factoring relationship, meets factoring minimums, and waits for standard transfers so there are no unexpected fees.
- The remaining value of the invoice is still $900.
The business pays a monthly maintenance fee of $50 to keep the account open.
- The remaining invoice value is not $850 and this is the remaining balance the business receives when the invoice is paid.
Overall the business managed to avoid any fees and received $9,850 for an invoice worth $10,000. For that month, the business had access to an additional $9,000 for expenses and it did not need to worry about managing accounts receivables or invoice collections because the factoring company handled it.
Circumstances That Influence Invoice Factoring Rates
Factoring companies manage potential risks when pricing a factoring contract. For these companies, the factoring relationship must compensate them fairly for the risk they take in the opening, servicing, and funding of a factoring account. As a business owner, thinking about factoring rates in these terms can help you negotiate lower rates and better terms successfully for your business.
Invoice factoring companies need to evaluate several of your customers to approve your factoring application. They must also take the time to understand the business and business history. This is all resource-intensive work, so factoring companies charge an upfront fee to reduce the number of businesses that apply with multiple factoring companies, potentially wasting their time.
In servicing an account, the factoring company must maintain a certain level of available cash, answer questions and requests from the business owner, and dedicate resources to managing and collecting outstanding invoices. These costs are included in the fee, but the fee is only sufficient if the business factors enough invoices. For these reasons, factoring companies add on additional performance fees to the discount rate.
The invoice factoring company also extends credit to businesses before it collects the invoice. In this case, the factoring company is taking the risk your customer may fail to pay the invoice, and it would need to collect from you. The risk of this happening with particular customers in a particular industry makes up the bulk of the total risk, which the factoring company incorporates into the discount rate.
Invoice factoring rates will vary by business, industry, factoring company, and even geographic location. The best way to get an exact rate is to apply with an invoice factoring company. Small business owners hoping to estimate factoring costs to analyze if it’s worth it should consider their invoice volume, how much they will likely factor, and the potential costs of factoring those invoices.