Factoring Buyer's Guide
Pricing
The cost of factoring is based on the discount rate – how much the factor will take from
your accounts receivable after they are paid in full. It can range from 1% to 5%, but is
most commonly 3% to 5%.
The discount rate for factoring services is a composite of several elements:
- Volume: Multiple invoices with higher values can get you better discount rates than fewer
invoices because it's less work for the factor.
- Customer base: If your invoices are for high-quality, credit-worthy clients, the factor
may provide a more favorable rate.
- Industry risk: The discount rate could be higher based on the industry you work in.
Factoring invoices from garment industries, for example, will require a higher rate
than from manufacturing plants because it's riskier which makes it difficult to secure
loans. Also, factoring for businesses in the medical and construction industries may
only provide 70% up front with a discount rate closer to the high-end due to the higher
risks associated with billing recovery.
- Client credit history: Unlike business
loans, factoring puts more importance on your clients' credit status than on yours.
And if your clients have a sketchy credit history, it may not disqualify you as a factoring
candidate but it could increase your rate to cover the factor's added risk.
- Billing considerations: Progress billing usually requires a higher factor fee since it
requires more upkeep and communication with vendors than non-progress billing.
Non-recourse factoring may cost more since the factor is taking on considerably higher risk.
Incremental pricing
Pricing for factoring services is typically set in 30-day increments. You pay the agreed-upon
discount rate to cover the first 30 days of the factor's service which starts immediately
after the factor validates the invoices. You will also pay additional daily fees for every
day the outstanding invoices are not paid during the initial 30-day period.
If your clients tend to pay their invoices quickly, you may want to take advantage of
"block pricing." With block pricing, you pay a slightly higher discount rate but are
charged less for bills that are paid in less than 30 days. With a typical increment of
10 days, for example, invoices that are paid in the first 10 days will only get charged
one third of the 30-day discount rate. If your monthly invoices total hundreds of thousands
of dollars, you may even qualify for daily increments for maximum savings.
The following demonstrates how much one can save on factoring services if the factor offers
incremental pricing. In this example, the company wants to factor $200,000 in total invoices.
| Increment |
Discount Rate |
Days until client
pays invoices |
Total factor fee |
 |
| Per 30 Days |
3% |
27 |
$6,000 |
|
| Per 30 Days |
3% |
6 |
$6,000 |
|
| Per 10 Days |
3.10% |
27 |
$6,200 |
|
| Per 10 Days |
3.10% |
15 |
$4,133 |
|
| Per 10 Days |
3.10% |
6 |
$2,067 |
|
| Per Day |
3.25% |
27 |
$5,850 |
|
| Per Day |
3.25% |
18 |
$3,900 |
|
| Per Day |
3.25% |
9 |
$1,950 |
Set-up costs
A factor may charge a one-time fee to get your account started. Set-up fees can run the
gamut from $500 for a basic application fee to $2,000 to $3,000 for the application along
with due diligence such as tax lien inquiries, credit report searches, and invoice validation.
There may also be a one-time brokerage fee of 0.5% to 3% to pay a broker that referred the
business. Make sure you get a detailed list of the fee schedule before you work with a
particular vendor.
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