Factoring Costs- Discount Rates and Fees
Factors charge a fee in exchange for the advance and work involved in collecting on your business’ outstanding invoices. This fee, also called a discount rate, can run from 1% to 5% of your submitted accounts receivable’s value, but the fees generally range from 3% to 5% in the majority of cases.
A number of different factors help a factoring company determine the discount rate offered.
Some factors that affect the fees and up-front percentages offered include:
- Your industry - Certain industries inherently carry more risk than others do when it comes to collecting monies owed. If you run a business in a higher-risk industry, such as in the garment and textile industries, chances are that your factor will require a higher discount rate and may limit the amount of funding that you are eligible to receive up front.
- Your clients - If you were working to acquire a small business loan, your credit would be one of the determining factors of your interest rate, or discount rate in this case. Because factoring loans rely on the ability of your clients to repay and their credit worthiness, if you maintain accounts with clients that have an established repayment history and a good credit rating, you will oftentimes receive a better discount rate and have more room for negotiation with your factor.
- Number of invoices – Each invoice that you submit to a factor for an advance increases their workload. By submitting fewer high-dollar invoices over a larger number of low-dollar invoices, you are decreasing the amount of work for the factor, thus opening up the possibility of negotiating a better discount rate if your factor does not offer it automatically.
- Type of billing – Progressive factoring will require more work for the factor, thus the discount rate will likely be higher for ongoing invoices as opposed to one-time, or non-progressive, invoicing.
- Type of factoring – If you want the factor to assume all the risk for unpaid accounts receivables, also known as non-recourse factoring, you should expect to pay more for this type of factoring service as they increase the factor’s risk considerably.
Account setup costs
Some factoring companies charge an account setup fee to businesses who wish to use their services. These fees can range from $500 to over $2,000 and help cover the costs of a factor’s time and efforts in running credit reports, validating your clients’ invoices and abilities to pay what they owe. Not all factors require setup fees, but this one-time charge is common in the industry.