What You Need To Know About Invoice Factoring Rates

Ezra Cabrera | November 16, 2023


    Invoice factoring, or accounts receivable factoring, is a way to turn your unpaid invoices into quick cash by selling them to an invoice factoring company. This can be a game-changer for businesses dealing with slow-paying customers or extended payment terms, as it boosts your cash flow.

    Invoice factoring rates are the charges that factoring companies levy on businesses for their services. The rates can differ based on various factors, such as your business's size and financial reputation, the industry you're in, and the specific factoring arrangement you choose.

    Before entering an agreement, it's crucial to understand these costs. Invoice factoring fees can be expensive, so comparing rates from different factoring companies is essential. In this article, we'll explain everything you need to know about invoice factoring rates.

    Recap: How Does Invoice Factoring Work?

    Invoice factoring allows businesses to ‘sell’ their customer’s outstanding invoices to a factoring company, called a factor. The factor buys the invoices at a discount – usually around 80% to 90% of the total invoice value. The business then gets a lump sum upfront, and they can use the proceeds to address any financial obligations.

    With invoice factoring, the factor will have complete control over the accounts receivable ledger. This also means they will be responsible for the payment chasing and collection. While this can be beneficial, especially if you don’t have enough resources, it could also be a deal-breaker for some because the customers will be aware that you’re using invoice factoring.

    Once the customers settle their balances, the factor will deduct the money they advanced, plus a small fee. Whatever remains of the money will then be transferred back to you.

    Recourse vs. Non-recourse Factoring

    Lenders may offer two types of invoice factoring: recourse and non-recourse factoring. The main difference between the two lies in who is responsible for the invoices if the customer defaults. Here’s a quick look at each type.

    Recourse Factoring

    With recourse factoring, the business will be responsible for the unpaid invoices if their customers default. Lenders will typically give you a few choices on how to make up for the losses:

    (1) you can exchange the invoice with another one of the same value, or;

    (2) you can pay the invoices yourself using your cash reserves.

    With recourse factoring, the borrowing business will assume 100% of the responsibility.  

    Non-Recourse Factoring

    In non-recourse factoring, the lender or factor will assume full responsibility for the invoices, whether paid or unpaid. This means that if the customer defaults on the payments, the factor will shoulder all the losses. Since the lenders take on most of the risk, non-recourse factoring is usually more expensive.

    What are Factoring Fees?

    Factoring fees are what factoring companies charge for their services. When a business sells its unpaid invoices to a factoring company, it takes a cut, usually a percentage of the invoice amount. This fee can vary depending on the deal's terms and conditions.

    Factoring fees or average factoring rates are typically calculated monthly or daily and can range from as low as 1% to 5% for the first month. If the invoice isn't paid on time, there may be additional fees for each period it remains unpaid.

    These fees are how factoring companies make a profit. They buy invoices at a discount and handle the task of collecting payment from your customers, allowing you to access cash quickly.

    How Are Factoring Fees Calculated?

    Most factoring companies calculate factoring fees based on an invoice's gross value and the period it takes for the invoice to be paid. The calculation can vary depending on whether the factoring company charges a fixed or variable-rate fee.

    For fixed-rate fees, the calculation is straightforward. The invoice value is multiplied by the fixed-rate percentage the factoring company charges. For example, if the factor charges a 4% flat rate and you have a $1,000 invoice, the fee would be $40 (4% of $1,000).

    Variable-rate fees are based on the duration the invoice remains unpaid. The factoring company may charge an initial fee (typically 2%–4.5% for the first month) and an additional fee (around 0.5%) for every extra ten days the invoice remains unpaid. The longer the payment delay, the higher the fee.

    Factoring companies can have different fee structures and may include additional fees such as credit protection or unearned reserve retained. Be sure to review the terms and conditions provided by the specific factoring company to understand the complete cost of factoring.

    Invoice Factoring Cost vs Invoice Factoring Rate

    Here's the difference between invoice factoring costs and rates:

    Invoice Factoring Cost

    This is the total amount you'll pay when you use invoice factoring. It covers all the fees, including the factoring rate, extra charges, and any other costs related to the service. It's what you'll spend in total.

    Invoice Factoring Rate

    This is a specific percentage of your invoice's value that the factoring company charges as its fee. It's a key part of the overall cost, and the actual rate can vary based on your business size, industry, and the terms of your factoring agreement.

    Understanding Invoice Factoring Costs

    Understanding the cost of invoice factoring involves considering the factoring rate, additional fees, your business's financial situation, agreement terms, volume, and industry specifics.

    Assess the following factors to determine the total cost and whether invoice factoring aligns with your financial needs and goals.

    Factoring Rate

    This is the primary fee charged by the factoring company. It's usually a percentage of the total invoice amount. For instance, if your invoice is worth $10,000, and the factoring rate is 2%, the cost would be $200.

    Additional Fees

    Some factoring companies may impose additional charges if your client doesn't pay promptly. These fees can vary but often accrue every month or in intervals, such as every 30 days the invoice remains unpaid.

    Creditworthiness and Terms

    The specific cost can also depend on your business's creditworthiness and the terms of your factoring agreement. A business with a strong credit history may secure a lower factoring rate.

    Volume and Frequency

    The volume and frequency of factoring can influence costs. Factoring larger volumes or doing it more frequently may lead to better rates.

    Industry and Client Risk

    The industry your business operates in, and the credit risk associated with your clients can also impact the cost. Some industries or riskier clients may result in higher factoring fees.

    Here's an example:

    Suppose you have a small business that provides a service, and you've issued an invoice to a client for $10,000. However, your client has a habit of paying late, and you can't afford to wait for the payment.

    You decide to use invoice factoring to get immediate cash. The factoring company charges a factoring rate of 3%, which is typical for your industry. They also charge an additional fee of 1% for each other 30 days the invoice goes unpaid.

    Here's how the cost breaks down:

    • Factoring Fee (3% of $10,000): $300

    • Additional Fee (for 30 days): $100

    So, in this scenario, the total cost of invoice factoring for the first month would be $300. If your client still hasn't paid after 30 days, you'd incur an additional $100 for the second month, making the total cost of factoring $400.

    This example illustrates how the cost of invoice factoring can vary based on the factoring rate and any additional fees, depending on the time it takes for your client to pay the invoice.

    Factors to Consider When Applying for Invoice Factoring

    When considering invoice factoring for your business, there are several important factors to consider to make an informed decision. Here are the key factors to consider:

    Business Needs and Goals

    Determine why you need invoice factoring. Is it to improve cash flow, fund growth, or manage seasonal fluctuations? Understanding your specific needs and goals will help you tailor your factoring arrangement accordingly.

    Cost and Fees

    Analyze the cost of invoice factoring, including the factoring rate and any additional fees. Compare these costs to your expected benefits to ensure it's a financially sound choice for your business.

    Factoring Company Reputation

    Research and select a reputable factoring company. Look for reviews, testimonials, and references to gauge their reliability and customer satisfaction.

    Factoring Terms

    Understand the terms of the factoring agreement. This includes the contract duration, any volume requirements, and termination clauses. Ensure the terms align with your business's cash flow and operational needs.


    Assess your client's creditworthiness, which can impact your factoring rate and approval. Factoring companies may check the creditworthiness of your customers since they'll be collecting payments from them.

    Industry-Specific Expertise

    Consider whether the factoring company specializes in your industry. Industry-specific expertise can be beneficial in understanding the unique aspects of your business and clients.


    Determine the flexibility of the factoring arrangement. Some companies offer recourse factoring (you're responsible if the customer doesn't pay) and non-recourse factoring (the factoring company assumes the risk). Choose the option that suits your risk tolerance.

    Customer Relationships

    Evaluate how invoice factoring might impact your relationships with clients. Some businesses may have concerns about clients knowing they're working with a factoring company, so clear communication may be necessary.

    Volume and Frequency

    Consider your invoice volume and how frequently you need to factor. Some factoring companies may have minimum volume requirements, while others specialize in smaller businesses.

    Application Process

    Understand the application and approval process. Some factoring companies have a quick turnaround, while others may require more documentation and time for approval.

    The Bottom Line: How Can You Find the Best Factoring Rates?

    Securing the best factoring rates for your business involves diligent research, comparison, and consideration of your specific needs. By partnering with a reputable company offering competitive terms and, when possible, negotiating effectively, you can optimize your financial resources and benefit from the advantages of invoice factoring.

    Frequently Asked Questions (FAQs)

    What is the average factoring rate for invoices?

    The typical rate for the first 30 days of factoring invoices can be between 1% and 5%. This rate might change based on how quickly your customers pay. Remember that the average factoring rate can differ depending on your industry and your specific situation.

    What is the best rate for factoring?

    The best rate for factoring depends on a number of factors, including the size and creditworthiness of your business, the industry you operate in, and the type of factoring arrangement you choose. However, you can generally expect to pay a monthly discount rate of 1% to 5% for invoice factoring.

    Some factoring companies may offer lower or higher rates depending on the specific factors mentioned above. For example, businesses with a strong credit history and a high volume of invoices may be able to negotiate lower rates. Businesses in riskier industries or with a history of late payments may be charged higher rates.

    Compare rates from multiple factoring companies before choosing one. You should also consider the fees involved, not just the discount rate. Some factoring companies may charge additional fees, such as origination, credit check, and late payment fees.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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