Factor Invoices: Why, How, and What Does It Cost?

December 26, 2018
Why Factor your invoices?

Thousands of companies across the U.S, Canada and the world decide to factor their invoices.

Why do they do it?

There are many specific reasons each business has in making this decision, but what it really comes down to is cash flow. Invoice factoring is a great way for growing businesses to have access to the working capital they need as they grow. Invoice Factoring is a very affordable, scalable and accessible form of financing making it a great option for businesses with working capital needs.

How does Factoring Work?

Invoice factoring works whereby a factoring company purchases an invoice from a business so that the business can receive the funds quickly instead of waiting 30, 60 or 90 days on payment terms. There are few main components that determine the specifics of a factoring relationship. They are:

  1. Factoring Fee
  2. Advanced Rate
  3. Maximum Amount Advanced
Factoring Fee

There is going to be a fee that is charged for the factoring company to provide the service. This can vary in structure and amount depending on the following:

  1. Which factoring company a business utilizes;
  2. The volume of invoices a business is looking to factor;
  3. The credit quality of their customers, and;
  4. The risk profile of the industry that a business is in.

Often fees are charged as a percentage of the total invoice value. A possible scenario would be 0.5% each 10 days an invoice remains outstanding. This would allow a company utilizing this service to easily determine that if a client pays in 30 days, the fee charged would be 1.5% of the total invoice value. Some factoring companies also charge administrative fees, bank wire or ACH fees, interest or a number of other types of fees. It is important to understand all the fees so that a business owner can make an informed decision.

Advance Rate

An advance rate is very much as it sounds. It is the percentage of the invoice value that is advanced when a factoring transaction takes place. A common advance rate in the staffing industry is 90%. So, if a staffing company sold an invoice worth $100 to an invoice factoring company, the factoring company would send them $90 upfront. Once the client paid the factoring company, the factoring company would take their fee and then the remainder would be put in a reserve account where the staffing company can request the remainder at any time. The advance rate very much depends on the industry and spread of risk among clients. Generally, though, advance rates are between 80-95% of the invoice value.

Maximum Amount Advanced

The maximum amount advanced is a number put into a factoring contract for the most the factoring company is willing to have advanced to a particular client. A business owner will want to make sure that the maximum amount advanced is in line with a business's goals for growth moving forward. If you are approaching your maximum and need it increased, put a request into your factoring company for an increase or try to find a factoring company that will give you the added availability you need.

An Example of a Factoring Transaction:

Factoring Fee: 0.5% each 10 days

Advance Rate: 90%

Maximum Amount Advanced: 1MM

Step 1: XYZ staffing company submits a $10,000 invoice to an invoice factoring company along with timecards to back up the invoice. The factoring company advances 90% of the amount of the factored invoices or $9,000 the same or next day.

Step 2: The accounts receivable factoring company holds the remaining 10% or $1,000 as security until the payment of the invoice has been received.

Step 3: The factoring company collects payment in 30 days.

Step 4: The factoring company takes the 1.5% fee or $150 and the remaining $850 is put in a reserve account that XYZ staffing company can request at any time.

How do I get set up with a factoring company?

Fill out a contact form, call or apply! Once you are in contact with a factoring company, they will generally have you fill out an application and submit some documentation, send you an offer and a contract. The setup process can take a few days to a couple weeks depending on the situation. If you have outstanding invoices that are due from other businesses, then you likely will qualify.

If you have any questions please feel free to call us at 1-877-648-3709.


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