What factors influence the cost and advance rates of invoice factoring?

Several aspects come into play:

  The fees for this service can vary from 2-5% of the invoice total.

So, if you have an invoice worth $1,000, a 3% fee would be $30.

What does 'advance' mean in this context?

This refers to the immediate funds you receive when we purchase your invoice. The remainder is given back to you when your client settles the invoice. The advance rates generally fall between 60-95% of the invoice value.

For instance, an 80% advance on a $1,000 invoice equals $800. The remaining $200, less the factoring fee, is given back to you once the invoice is paid.

How do factoring rates stack up against bank loans?

  Compared to traditional bank lending rates, invoice factoring may initially seem pricey. Let's explore some common queries from prospective factoring clients

Wow! 3 points per month!

That's 36 percent a year! (Rates range from 1.5- 3 points) It's tempting to calculate yearly rates, but that's like comparing apples to oranges. Banks charge annual interest on loans, like 12 percent a year. We buy your invoices at a reduced rate. It's a different product, and other factors make this comparison unsuitable.

While a bank gives you a loan once, we provide cash on an ongoing basis. For example, a $100,000 bank loan at 12 percent gives you $100,000 once, and then you pay $1,000 monthly interest while still owing the full $100,000. In contrast, factoring $100,000 each month for a year means you get the use of $1.2 million throughout the year. A 3 point discount would mean annual fees of $36,000, which is just 3 percent of $1.2 million. Plus, you have no debt at the end of the year!

My business only makes a 3% profit, how can I afford a 3 point fee?

  A business making a slim 3% profit can benefit from higher sales volume through factoring, and the increased volume can lead to higher profit margins as fixed costs won't rise in line with sales volume. As sales volume grows, production costs drop, boosting profits. Fixed expenses such as rent, electricity, and insurance typically won't rise much, if at all, with volume.

Let's crunch the numbers to see what could happen if you doubled your sales with factoring

Without Factoring:

Monthly Sales-$50,000
Cost of Goods Sold-$30,000 60% of Sales
Gross Profit-$20,000-40% of Sales
Fixed Expenses-$10,000
Variable Expenses-$8,500-17% of Sales
Factoring Fee-N/A
Total Expenses-$18,500-37% of Sales
Net Profit-$1,500-3% of Sales

With Factoring:

Monthly Sales-$100,000
Cost of Goods Sold-$60,000-60% of Sales
Gross Profit-$40,000-40% of Sales
Fixed Expenses-$10,000
Variable Expenses-$17,000-17% of Sales
Factoring Fee-$3,000-3% Fee
Total Expenses-$30,000-30% of Sales
Net Profit-$10,000-10% of Sales

But I only get 80% of my money upfront!

(Advances typically range from 80%-97%) Let's say you get an 80% advance. In January, you factor $100,000 and get $80,000 upfront. The rest comprises the fee (3%) of $3,000 and the reserve (17%) of $17,000.

In February, you factor another $100,000 and receive $80,000 plus your January reserve of $17,000 (assuming your customer pays in 30 days). So for February, you get 97% of your money, not just 80%. From the second month onwards, you're essentially receiving 97% of your cash flow.

What if my customers take longer than 30 days to pay?

  You have options. For example, if a client takes 60 days to pay, you could wait 30 days before factoring that invoice, thus paying the 30 day fee. Alternatively, you could factor invoices from faster-paying customers first to get the cash you need.