Most businesses searching for invoice factoring rates assume the lowest rate is best. Like most things, the truth is more complicated. Factoring rates are based on many factors — This guide will give you an overview of factoring fee structures and other costs you’re likely to find in an invoice factoring agreement. We’ll also compare factoring rates with alternative financing options.

Invoice Factoring Costs

Average 30 Day Factoring Rates

IndustryAdvance RateFactoring Rate
B2B Business70% to 85%1% to 4.5%
Construction70% to 80%2.5% to 4%
Medical Billing60% to 80%2.5% to 4.5%
Staffing85% to 93%1% to 3.5%
Trucking90% to 97%1% to 5%

Variable Rate or Flat Rate Pricing

Factoring companies often use a variable rate fee structure, especially in industries where customers often pay late or at irregular intervals.

Example variable rate fee structure:

RateTime Period
0.70%First 10 days
1.15%Next 15 days
2.65%Following 30 days
0.85%Each additional 10 days

Variable rate pricing carries a slight conflict of interest: since the factoring company handles collections, if they are slow to collect, it will end up costing you more since their fee increases the longer an invoice remains unpaid.

You have a better chance of negotiating flat rate pricing if your customers usually pay on time. However, don’t get hung up trying to get the lowest rate.

It’s better to focus on the per dollar cost of factoring – that is how much each dollar you’re advanced costs you.

Per Dollar Cost of Factoring

Determining the per dollar cost is the best way to compare proposals from competing factors. This shows you the cost of each dollar you’re getting in the advance installment. To calculate the cost, you need the invoice value, advance rate, and factoring rate.

Per Dollar Cost Example

In the example below, the invoice value is $10,000.

“Proposal 1” has an advance rate of 70% with a 30 day average factoring rate of 3%.

Although “Proposal 2” has a higher factoring rate, it’s actually about 27% cheaper based on its per dollar cost.

The larger advance offsets the higher factoring rate. Given these options, “Proposal 2” is the obvious choice.

Per Dollar Cost Factoring Calculator

Click on the image above to view the spreadsheet. Fill in your invoice value, advance rate, and factoring rate (using a 30 day average) to compare the per dollar cost of each proposal.

Remember that factoring rates and advances can differ from one provider to another. It is definitely worth your time to shop around.

How Are Factoring Rates Determined?

1. Volume

Volume is the most important factor for a factor to determine a factoring rate. Bigger clients with more invoices always command the lowest rates.

Volume is a combination of the number of invoices and the total value.

2. Average Invoice Value

Clients with a high volume of large invoices command the lowest rates. It is much simpler for a factor to collect a single $50,000 invoice than twenty-five $2,000 invoices from different customers.

In both cases they are collecting $50,000, however, doing a credit check and follow up for a single customer is 25 times less work for the factor.

3. Customer Risk

Whereas volume makes the rate come down, customer risk makes it go up. The extent depends on how the customer and the transaction are rated by the factor.

If your customers have bad credit, expect higher fees.

4. Industry

If your industry is know for late payments, defaults, or otherwise difficult clients, expect to pay more.

Industries that require factors to have specialized knowledge to determine risk will also cause a rate increase.

Low Risk IndustriesHigh Risk Industries
TruckingMedical / Healthcare
StaffingConstruction
ConsultingRequiring Specialized Knowledge

5. Your Track Record

Although your customers creditworthiness will have a greater impact on factoring rates than the health of your business, your track record still matters.

How long have you been in business? How stable are your sales? If you are a newer business, you’re likely to receive a slightly higher rate.

Additional Considerations

Funding Time

During the evaluation process, expect to get proposals in a day or two. Once you have an agreement in place, it may be possible to get same day funding on factored invoices, especially if your customer has already had an invoice serviced by your factor.

If you are just starting out, the entire process could take a week or two from proposal to funding.

Recourse vs Non-Recourse

The majority of factoring companies offer recourse factoring — where you are liable for the invoice value if your customer goes bankrupt and is unable to pay their debt. Because there is less risk on the part of the factoring company, the rates are usually lower than non-recourse factoring agreements.

Related: Key Differences Between Recourse and Non-Recourse Factoring

Fees

Setup Fee

This onetime fee could be as much as $2,000. Check with providers to find out what it covers and if it’s possible to waive based on invoice volume.

Invoice Upload Fee

Normally invoices you want to factor are sent digitally through an online portal or email. If you are reliant on paper records and need to mail invoices, factoring companies may charge a processing fee.

Credit Check Fee

Some factoring companies charge credit check fees for each new customer. If you have a lot of turnover, look for a factor that either has low or no credit check fees.

Minimum Volume Fee

Contract-based factoring rates are based primarily on volume. If you cannot maintain a minimum volume, expect to see a rate increase or be charged a fee.

Minimum volume may be based on the number of invoices factored or the total value.

Lockbox Fee

The account where funds are held until customers pay invoices is called a lockbox. Some factoring companies charge a fee to maintain this account.

Wire Fee

Most factoring companies prefer to use ACH payments. If you wire funds in or out of your account, they will probably charge you a fee.

Maintenance Fee

Could also be called a servicing or administrative fee. This is used to cover costs for maintaining your account.

Early Termination Fee

Contracts for invoice factoring usually range from 6 to 18 months. If you dissolve your contract before the term is over you will need to pay a termination fee.

Alternatives to Invoice Factoring

There is no shortage of choices for business financing. To make the best choice, be sure to look at all your options.

Invoice Financing

APR Range10% to 84%Maximum Loan Amount$850,000
Minimum Credit Score500

Invoice financing is similar to factoring, but rather than selling the invoices you use them as collateral for a loan. Once you’ve collected your customers’ debts, you pay back your loan.

Although the rates are similar, you handle collections, which may represent an additional cost.

Business Credit Cards

APR Range17% to 34%Maximum Loan Amount$100,000
Minimum Credit Score660

If you have good credit, there are many advantages to financing business purchases with credit cards. The flexible payment terms are the main advantage, but by choosing the right card you can also earn bonus points and rewards on all purchases.

Short-Term Loans

APR Range9% to 99%Maximum Loan Amount$250,000
Minimum Credit Score550

Short-term loans provide businesses with cash for immediate financing needs. They are usually used to help you get through a tough business cycle or to fund a new opportunity.

Invoice factoring is a better solution for long-term cash flow management.

Installment Loans

APR Range8% to 24%Maximum Loan Amount$100,000
Minimum Credit Score700Origination Fee1 to 8 points

Installment loans are available for many types of business equipment purchases. These loans do not require specific collateral, so you will only be approved if you have good credit.

Normally lenders require that you’ve been in business for at least one year.

Hard Money Business Loans

APR Range8% to 15%Maximum Loan Amount$250,000
Minimum Credit Scoren/aOrigination Fee2 to 8 points

Hard money business loans are a high risk asset-based loan. These are normally used by companies that cannot qualify for other types of loans to finance their expansion. They could be a good option to fund an investment opportunity when a company has used up their lines of credit.

Private investors, mortgage companies, banks, and the SBA provide hard money business loans.

Final Word on Invoice Factoring Rates

For many businesses, invoice factoring remains a popular and affordable method to increase free cash flow. You can use the cash to pay expenses or invest in growth.

Factoring rates and fees are impacted by many factors including volume, invoice value, customer risk, and the industry your business is in. As you review providers and proposals, pay attention to the advance rate and per dollar cost of each.

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