How do they work out the fees and advance rates for invoice factoring?

These are based on several things:

  The fees can be anywhere between 2-5% of the invoice's total cost.

So, if an invoice is for $1,000, a 3% fee would be $30.

What is an advance?

This is the money you get straight away when we buy your invoice. You'll get the rest when your customer pays the invoice. Advances are usually 60-95% of the invoice's total cost.

If the invoice is for $1,000 and the advance rate is 80%, that's $800 up front. When your customer pays the invoice, you'll get the remaining $200, minus the factoring fee.

How do invoice factoring rates compare to bank loan rates?

  At first glance, invoice factoring seems a lot pricier than a bank loan. Here are five common questions or concerns raised by people thinking about invoice factoring

3% a month! That's 36% a year! (Rates usually range between 1.5-3%)

It might be tempting to compare it to an annual bank loan rate, but this isn't a fair comparison. Banks loan money at an annual rate, while we buy your invoices at a discounted price. The two services aren't the same.

When you get a bank loan, you only get the money once, but with invoice factoring, you can get money regularly. With a bank loan, you still owe the original amount and have to pay interest on top. But with invoice factoring, you could have up to $1.2 million over a year if you factor $100,000 each month. You'd only pay 3% of that total, and have no debt at the end of the year!

If my business only makes 3% profit, how can I afford a 3% fee?

  Even if your business is only making a 3% profit, invoice factoring could help you do more business. More business can lead to bigger profits because your fixed costs (rent, electricity, insurance, etc.) won't increase with your volume. So the more business you do, the more money you make!

Let's look at some figures. Let's say you could double your sales. Here's what it could look like:

Without Factoring

Monthly Gross Sales-$50,000
Cost of Goods Sold-$30,000 (60% of Gross Sales)
Monthly Gross Profit-$20,000 (40% of Gross Sales)
Fixed Expenses-$10,000
Variable Expenses-$8,500 (17% of Gross sales)
Factoring Fee-None
Total Expenses-$18,500 (37% of Gross Sales)
Monthly Net Profit-$1,500 (3% of Gross Sales)

With Factoring

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

But I only get 80% of my money straight away!

(Advances typically range from 80%-97%) If you get an 80% advance and start factoring in January, you'll get $80,000 upfront on a $100,000 invoice. The remaining $20,000 is made up of the 3% fee ($3,000) and the reserve (17%, or $17,000).

In February, you factor another $100,000 invoice and get another $80,000 upfront. You'll also get your January reserve of $17,000 (assuming your customer pays within 30 days). This means you actually get 97% of your money in February, not just 80%. From the second month onwards, you're basically getting 97% of your cash flow.

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

  You have a few options if this is the case. One is to wait 30 days before factoring an invoice. That way, you only pay the 30-day fee. Another option is to factor your quicker-paying customers first to get the cash you need.