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Factoring Rates & Fees Explained

July 24, 2018

When deciding which factoring company to use, one of the first questions asked is, “What are your factoring rates?” While factors offer different levels of service (some of which may be very important to your business), understanding the cost of factoring is critical. Unfortunately, comparing costs can be challenging, so you need to be able to ask the right questions. This guide should help you ask the right questions to get the best program for your business.

Understanding factoring ratesWhat Do Factoring Companies Consider in Setting Rates?

Generally, factoring rates depend on the total amount of invoicing you are able to sell. The more monthly volume you factor, the lower the rate you’ll be charged.

When a factoring company purchases your invoice, they are taking the risk that your customer will pay it. This is why your customer’s credit will affect your rate. If you choose non-recourse factoring, the factor will charge more for the added credit risk.

“Time is money” in any type of financing, including factoring. The payment terms you’ve negotiated with your customer and the factor’s experience in working with that account debtor will affect your rate.

Get a Rate for a Customized Program Today

What Goes Into Factoring Rates?

Factors structure their fees in many different ways.  It’s important that you understand what goes into the fee you’ve agreed to pay for factoring services (and what you get for those fees). What’s best for your business may not be what works for another.

The total fees a factor charges can vary widely based on the type of program you choose. You may choose a flat rate, where the factor charges a percentage of the amount of the purchased invoice, regardless of how long it takes to pay. Factors also offer tiered rates, where the amount you pay depends entirely on how long it takes your customer to pay. Or, you may want to select a combination of the two—a “Prime plus” program, where you are charged a percentage of the invoice and a fixed interest rate (usually tied to the Prime Rate charged by banks). The fee for a “Prime plus” structure depends on how quickly the invoice is paid but doesn’t have “jumps” from one tier to the next.

Each fee structure has advantages and disadvantages, depending on your type of work and mix of customers. Carefully compare the total costs of different fee structures.

Comparing Factoring Rates

Though some factors may make it difficult to compare “apples to apples,” you should be able to calculate how much the basic rate types will cost you. Here are some examples of three common factoring rate types.

Flat Factoring Rate*

Monthly Volume: $200,000
Advance Rate: 90%
Factoring Rate 1-60 Days: 4.00%
Recourse: 60 Days

Flat Rate Example
Invoice Value: $1,000
Advance Amount: $1,000 x 90% = $900
Invoice Paid: 50 Days
Factoring Fee: $1,000 x 4.00% = $40
Final Disbursement: $100 – $40= $60
Total Cash from Factoring: $900 + $60 = $960

Tiered Factoring Rate*

Monthly Volume: $200,000
Advance Rate: 90%
Factoring Rate 1-45 Days: 2.00%
Factoring Rate – An Additional % Every 15 Days: +2.00%
Recourse: 60 Days

Tiered Rate Example
Invoice Value: $1,000
Advance Amount: $1,000 x 90% = $900
Invoice Paid: 50 Days
Factoring Fee: $1,000 x 4.00% = $40
Final Disbursement: $100 – $40 = $60
Total Cash from Factoring: $900 + $60 = $960

Prime Plus Program*

Monthly Volume: $200,000
Advance Rate: 90%
Prime Rate + 2: 5.00% + 2.00%
Factoring Rate: 3.00%
Recourse: 90 Days

Prime Plus Program Example
Invoice Value: $1,000
Advance Amount: $1,000 x 90% = $900
Invoice Paid: 30 Days
Factoring Fee (flat for 90 days): $1,000 x 3.00% = $30
Interest Fee (Prime +2): $1,000 x 0.583% = $5.83
Total Factoring Cost: $35.83
Final Disbursement: $64.17
Total Cash from Factoring: $964.17

*The scenarios above are just examples and not our actual rates. To get a custom quote on a factoring program that works best for you, fill out the website form or give us a call at 800-707-4845.

Cost of Factoring Receivables

Besides the rate type you choose, there may be other charges that affect how much you ultimately pay for factoring. “Full service” factoring usually includes free credit and collection services, which helps you decide what customers to work with and gets your invoices paid quicker. Some factors may offer “low rates” but charge extra for these services. Others add fees for each transaction, for going below minimum monthly volumes, for getting out of a contract, or for other events. These fees can add up over time or hit you all at once, so it’s important that you know what to expect going in. Sometimes, “lower rates” can result in a much higher total cost of factoring.

What Can TCI Business Capital Offer My Business?

Since 1994, TCI Business Capital has worked with thousands of businesses to come up with invoice factoring programs that work best for their unique circumstances. Our industry-leading service comes with rates that other factors can’t beat, letting you focus on growing your business.  We back up our low-cost promises with month-to-month contracts, so you’re never stuck in a program that isn’t right for you. To get a free, no-obligation quote, contact us today at 800-707-4845 or fill out the form below.

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