This article helps you understand how much you can expect to pay for accounts receivable factoring services. It explains the components of the cost and how to calculate your cost per factored dollar. The article assumes that you already know how factoring works. If you are not familiar with factoring, here is more information.
Understanding How Factoring Costs Work
Factoring proposals always include two numbers: the factoring rate and the advance rate. Most business owners assume that the cost of the factoring service is determined only by the factoring rate they get.
This assumption is incorrect and is a potentially costly mistake.
Rate is merely one of the two components of your cost. The second component is the advance rate. You need both rates to determine your actual cost per dollar. The cost per dollar is the truecost of your factoring service.
Let’s compare two possible proposals. Which one do you think is better?
- A 70% advance at a rate of 3.00% per 30 days, or
- An 80% advance at a rate of 3.43% per 30 days
Judging by rate alone, you would say that the 3% rate offered in proposal #1 is a better deal. Proposal #1 has the lower factoring rate. Proposal #2 has a higher factoring rate but also offers a higher advance rate.
Actually, both proposals have the same cost per dollar of funding. If you divide 0.03 by 0.70 and multiply it by 100 (cents), you get the cost per dollar of 4.29 cents. Likewise, 0.0343/0.80 x 100 yields the same result.
So, then, which proposal is better? This conclusion depends on your cash flow needs. If a 70% advance offers you enough working capital, then proposal #1 is the better option. If you need a higher advance because you need more working capital, then proposal #2 is better. From a cost-per-dollar perspective, however, they are the same.
For more information, learn about typical factoring rates and how they are determined.
Factoring Rates by Industry
The following table provides a list of approximate advances and factoring rates for different industries. Note that the lower costs usually apply to accounts that have a higherfactored volume. Conversely, the higher costs apply to factoring clients with a lower factoring volume. Keep in mind that these rates vary by factoring company.
|Industry||Advance Rate||Factoring Rate|
|General Business||70% to 80%||1.5% to 4.5%|
|Staffing||90% to 92%||1.5% to 3.5%|
|Transportation||90% to 96%||1.5% to 5.0%|
|Medical||60% to 80%||3.0% to 4.0%|
|Construction||70% to 75%||2.5% to 3.5%|
Additional Costs to Keep in Mind
Some factoring companies add costs to the services they offer. These costs vary by company; in fact, some factors don’t charge them at all. Examples of other costs that some factors charge include:
- Due diligence
- Account maintenance
- Lockbox setup and maintenance
- Minimum invoice size
- Minimum factored volume
- Credit checks
Keep these costs in mind when comparing factoring companies. These costs can add up and become expensive, especially if they are recurring or if your contract has minimums (#5).
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