Invoice Factoring Knowledge: Hub / FAQ
How Much Does Invoice Factoring Cost?
“The cost of invoice factoring typically ranges between 1% to 5% of the invoice value monthly. Invoice factoring discounts depend heavily on the industry, amount sold, how long it takes for payment and the perceived creditworthiness of an Account Debtor.”
Invoice Factoring Cost Example
| Step | Description | Calculation | Amount |
|---|---|---|---|
| 1 | Invoice issued to customer | – | $10,000 |
| 2 | Advance from factoring company (85%) | $10,000 × 85% | $8,500 |
| 3 | Accrued Reserve created (15%) | $10,000 × 15% | $1,500 |
| 4 | Customer pays factoring company in 30 days | – | $10,000 |
| 5 | Factoring fee (2% of invoice for 30 days) | $10,000 × 2% | $200 |
| 6 | Cash Reserve returned after fee deduction | $1,500 – $200 | $1,300 |
| Final Net Received | Advance + Returned Reserve | $8,500 + $1,300 | $9,800 |
Quick comparison 30/60/90 days to pay
| Pay Timing | Advance (85%) | Reserve (15%) | Fee (2% per 30d) | Reserve Returned | Total You Receive | Total Cost |
|---|---|---|---|---|---|---|
| 30 days | $8,500 | $1,500 | $200 | $1,300 | $9,800 | $200 |
| 60 days | $8,500 | $1,500 | $400 | $1,100 | $9,600 | $400 |
| 90 days | $8,500 | $1,500 | $600 | $900 | $9,400 | $600 |
How to pick an Invoice Factoring Company?
“To choose an invoice factoring company, evaluate industry experience, advance rates, discounts and fees, contract terms and speed.”
Before you begin your search
- Assess your needs: Determine how much supplemental cash you need and how quickly. Are you looking to sell all of your receivables or a select group of customers to bridge cash requirements?
- Review your customer base. Invoice factoring works best for both parties when customers with reliable payment trends are factored.
Key Considerations when choosing an Invoice Factoring Company
Discount Fees & Rates
- Discount rates can vary between 1% to 5% of invoice value monthly. Discount Rates are heavily influenced by:
- Volume Factored Monthly
- Credit quality of Customers
- Payment Terms extended (Net 30, 60, 90)
- Concentration
- Industry
- Term of factoring relationship
- Invoice Factoring Companies may charge a straight discount and the Prime Rate plus a margin (Prime plus 2% annually) to account for changes in the Prime Rate.
- Invoice Factoring Companies may also have additional fees for applications, monthly minimums, wire processing or maintenance fees.
Industry Expertise
- An invoice factoring company with experience in your industry will be more aggressive with rates and terms.
Reserve Accounts
- After the Invoice Factoring Company receives payment, how quickly will they release the balance due you?
Advance Rates
- This is the amount you receive up-front. Advances generally range between 70%-98% of the invoice amount. Higher advances usually indicate the factor has a niche within a specific industry (trucking or temporary staffing).
Recourse vs non-recourse
- Recourse requires you to purchase invoice back after a certain period. Often Recourse arrangements have lower discounts.
- Non-Recourse can provide you protection against non-payment if the customer does not pay due to insolvency provided the customer is insurable.
Negotiable Terms
- Factoring Agreements with lengths greater than 6 months often provide lower discount rates.
- Discount rates can be negotiated with higher monthly volume.
- Discount fees can be structured daily, weekly or monthly.
- Monthly Volume is negotiable.
Reputation & Stability
- Look for a factoring company with a niche in your industry, established operating history, management team with specific invoice factoring experience, strong financial backing and transparency in service.
- Look for legitimate online reviews, accredited associations and industry affiliations.
How Does Invoice Factoring Work?
“Invoice Factoring is a form of business financing where a business sells its unpaid invoices to a third-party company, known as a Factoring Company in exchange for an immediate cash advance”. Businesses that have large daily working capital demands who sell to creditworthy slow paying customers that can’t access bank financing benefit greatly from this service.
Factoring is a widely used form of finance for businesses who sell on net terms but can’t afford to wait for slow customer payments.
The Factoring Process
- Invoice your customer. In order to be eligible to factor your invoices, goods or services must be completed and an invoice sent to your customer.
- Set-up your customer with the Factor. Prior to selling an invoice, the factor must credit approve your customer.
- Submit the invoice to the factor. Once the factor has approved the customer, submit the invoice(s) you which to factor.
- Receive an up-front advance. Once the factor has verified the invoice, they will make an advance between 70%-98% of the invoice amount.
- Customer makes the payment. The factor will monitor the invoice and collect the payment directly from your customer in the normal course of business. Factors rarely can influence a customer to pay quicker.
- Reserve is returned to you. Once the factor receives the payment the factor removes its earned discount and remits the reserve balance back.
Invoice Factoring Example
| Step | Description | Calculation | Amount |
|---|---|---|---|
| 1 | Invoice issued to customer | – | $10,000 |
| 2 | Advance from factoring company (85%) | $10,000 × 85% | $8,500 |
| 3 | Accrued Reserve created (15%) | $10,000 × 15% | $1,500 |
| 4 | Customer pays factoring company in 30 days | – | $10,000 |
| 5 | Factoring fee (2% of invoice for 30 days) | $10,000 × 2% | $200 |
| 6 | Cash Reserve returned after fee deduction | $1,500 – $200 | $1,300 |
| Final Net Received | Advance + Returned Reserve | $8,500 + $1,300 | $9,800 |
Quick comparison 30/60/90 days to pay
| Pay Timing | Advance (85%) | Reserve (15%) | Fee (2% per 30d) | Reserve Returned | Total You Receive | Total Cost |
|---|---|---|---|---|---|---|
| 30 days | $8,500 | $1,500 | $200 | $1,300 | $9,800 | $200 |
| 60 days | $8,500 | $1,500 | $400 | $1,100 | $9,600 | $400 |
| 90 days | $8,500 | $1,500 | $600 | $900 | $9,400 | $600 |
Best Factoring Company for Staffing
Choosing the “best” factoring company for a staffing agency depends on your specific needs.
Some questions to consider:
- Frequency of Payroll. The demands of your payroll cycle (Daily, Weekly, Bi-Weekly or Monthly) may pose challenges for factors not equipped to support your administrative requirement. Choose a factor that is comfortable with same day funding or can offer funding guarantees.
- Frequency of Invoicing. Invoicing determines funding from the factoring company. Some customers may only allow for 1 invoice to be submitted at the end of the a period thereby you can’t invoice your customer more frequently than 1 time per month. If you have payroll weekly, your factor may allow you to provide interim billing giving you funding availability. This is essentially creating an invoice only for the factor in which to obtain funding.
- Gross Profit Margin. If you provide services in a competitive market, a factoring company that can offer a higher advance and lower discount rate is critical.
- Payment Terms. If you are required to extend greater than net 60, many factoring companies are uncomfortable with payments beyond Net 60. Look for a factoring company that can provide eligibility up to 120 days.
- Growth. Experienced staffing company entrepreneurs can grow rapidly. Find a factoring company that can grow with your sales.
- Automation. Factoring Companies that can integrate directly with accounting software like QuickBooks, NetSuite or Zero and staffing software like, Zoho, Hubstaff, Timetrack can save daily administrative time and resources.
Marc Marin is a seasoned expert in business financing, author, speaker, and educator with over 20 years of experience helping companies access working capital through factoring and funding solutions. He is known for making complex financial topics clear and actionable for business owners and finance professionals.