Typical Factoring Rates

The decision to use financing to improve your cash flow and grow your company is critical. The right solution can help improve your sales and put on the path to growth. However, choosing the wrong solution, or an alternative that is too expensive, could make things worse.

From this article, you will learn:

  • What things factors consider to determine your rate
  • Why rate is not the same as cost (this is important!)
  • Typical factoring rates

To learn more about factoring in general, read “How Does Factoring Work?” Or, if you just want an instant rate quote, try this form.

What affects your factoring rate?

There are two things that affect your factoring rate – the factor’s risk of buying your invoices and your factoring volume. Low-risk transactions that have a high volume usually qualify for low factoring rates. On the other hand, high-risk transactions with low volumes usually get higher factoring rates.

It’s really that simple.

Factoring companies determine your risk and factoring volume by reviewing five things. By the way, each factoring company is different and may look at things somewhat differently.

#1 Your monthly factored volume

Factoring is a volume-based business, not unlike a wholesale company. And high volumes get you discounts. Basically, if you factor a high volume of sales you can expect to get a lower per-dollar rate. Factoring volume is by far the most important variable used in determining your rate.

#2 The size of each invoice

The factoring business is very labor intensive, so the size of your invoices matters – at least, to an extent. For example, it’s easier for a factor to process a single $10,000 invoice than it is to process ten $1,000 invoices. Even though they both total $10,000, processing ten invoices is almost ten times as much work as processing a single invoice. This labor affects your cost.

However, small invoices affect your cost only to a certain extent. Although financing ten $10,000 invoices is more work than financing a single $100,000, the rate would be almost the same. Why? Because the individual invoices are large enough to generate the revenues necessary to cover the labor cost.

#3 Your industry

Your industry also affects your rates. Industries that are seen as low risk – such as transportation, staffing, and consulting – often get lower rates and better terms than other industries. On the other hand, risky industries like construction or labor-intensive industries like healthcare often get higher rates.

#4 The credit quality of your clients

Contrary to what most people believe, the creditworthiness of your client has little influence on your rate. It does have some influence, but it is usually not significant (there are exceptions). Instead, creditworthiness is used as a tool to decide whether or not an invoice will be funded.

#5 The stability of your business

Lastly, factoring companies assess the stability of your business and your trading history to make a rate decision. Companies with a reasonably long and stable history are seen as safe. They get slightly lower rates. New companies, or companies with unsteady sales, are seen as risky and often get slightly higher rates.

Factoring cost vs. factoring rate

Most companies that seek factoring often focus on getting the lowest possible rate. While the lowest rate can sometimes provide the lowest total cost, this is not always the case. Instead, business owners should focus on the total cost per dollar of the proposal.

A factoring transaction often has two (or more) components: the factoring advance and the rate. You need both components to calculate your total cost per dollar.

The advance is the percentage of the invoice that you get up front. The rate is the cost of financing, based on the face value of the invoice. This last point is important.

Here is an example to show why this point is important. Which of the following is cheaper?

  1. A 70% advance at a rate of 3.00% per 30 days, or
  2. An 80% advance at a rate of 3.43% per 30 days

If you chose option #1 (70% at 3%) you are incorrect. This was actually a trick question. They both have the same “cost per dollar.”

Dividing 0.03 by 0.70 and multiplying by 100 (cents) gets you the cost per dollar of 4.29 cents. Likewise, 0.0343/0.80 x 100 cents yields the same result.

For details of how to review cost, read “The True Cost of Factoring.”

Average factoring rates

However, we’d like to give you an idea of the rates that most factors charge. Rates generally range from 1.15% to 4.5% per 30 days. Advances usually range from 70% to 85%. There are some exceptions, such as transportation and staffing, where advances can reach or exceed 90%. Rates and advances vary based on volume, industry, and the other variables we discussed.

Additional resource: The Truth about Cheap Factoring Rates

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