Discount Rates and Fees

Factoring Discount Rates and Fees

Factoring companies charge a discount fee for the cash advances that they provide to their clients. The discount rate compensates factors for the risk inherent in factoring and for the work involved in collecting a business’ outstanding invoices.

The discount rate can range between 1% and 5% of the face value of all submitted receivables, depending on the type of factoring arrangement. (Please refer to “Types of Factoring” for more in-depth discussion.)

There are typically two variables factors use to determine their fee: gross amount of the invoice and the days the invoice remains outstanding. Taken one step further, there are several ways in which factors can calculate their fees.

Flat-rate pricing

Some factors do not take time into account, and charge a simple flat rate of the gross amount of the invoice. In this case, the factor would charge you the same fee whether your invoice was out for thirty, forty-five, or ninety days.

Block-time pricing

Most other factors calculate their fee based on blocks of time the invoice remains outstanding. Typically, you would be charged one rate for the first thirty days, and another rate for subsequent 10 to 15-day block periods. As in the flat rate model, block time fees mean that an invoice out for 31 days would be charged the same as if it were out for 39 or more days, and so on for each block of time.

Per-diem pricing

This fee model apportions the fee based on actual days invoices are outstanding. In this case, the fee would be calculated at a per day rate. The advantage of this fee methodology is the elimination of "rounding up" a factor's fee since the fee is directly proportional to the amount of time the invoice remains outstanding.

A number of different criteria help a factoring company determine the discount rate offered.

Some of the criteria that affect the fees and up-front percentages offered include:

Your industry - Certain industries inherently carry more risk than do others 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 customers - If you were in need of a business loan, your credit would be one of the factors determining your interest rate, or discount rate in this case. The amount of advanced funds relies in part on the ability of your customers to pay the invoice as well as their credit worthiness. So if you maintain accounts with customers 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 it considerably increases the factor’s risk. (Please refer to “Types of Factoring” for more in-depth discussion.)

Advance Rate

The advance rate offered by a factor is based on the potential risk and collection costs to the factor. The criteria for determining advance rates are based on several criteria. Advance rates generally range between 80% and 90% of gross invoice amount.

The criteria include:
Your industry
Customer creditworthiness
Customer concentration
Invoice volume
Average invoice size
Invoice aging

In some instances, but not all, a factoring company may charge businesses an account set-up fee to use their services. These fees serve to cover the costs of a factor’s time and efforts to set up the account, run credit reports, validate your clients’ invoice(s) and abilities to pay the invoice(s). But these fees vary widely in the industry and, again, not all factors require set-up fees.

Disclaimer

The discount rates, fees, and advance rates offered by factoring services will ultimately depend upon the contract negotiations between a client and its prospective factoring company. Grayco Factor Locators is not an agent for any factor, and as such Grayco Factor Locators does not guarantee the final cost (i.e., discount fees and advance rates) of factoring for any client. The final cost for any factoring agreement may be higher or lower depending on the particular circumstances of each client.