Comparing Factoring Fees
Primarily, there are three ways that factoring companies assess fees. They charge a flat fee, tiered fees, or an administrative fee and interest. For our purpose here, we will look at flat fees and tiered fees since administrative fees plus interest are not widely used in factoring any more.
Flat fees, sometimes called fixed fees, are the easiest to figure out as you pay a flat percentage on all the invoices you factor, no matter when they are paid. For example, the factoring company charges 2% on invoices that are collected within a certain period of time, usually around 60 to 90 days. If you factor $2000 in invoices with a flat rate of 2% up to 60 days, you pay $40 (2% of $2000) as long as the payments are collected within 60 days. Obviously, calculating your costs with this method is relatively straightforward. All you have to do to calculate your costs is subtract the percent of the fee from the total dollar amount of your invoices paid within 60 days.
Tiered fees can get a little more complicated. A tiered payment schedule bases cost on the time frame within which your customers pay their invoices. You get charged lower fees on faster paying customers and higher fees on slower paying customers. For example, $2000 worth of invoices collected between 31 and 40 days costs $40 (2% of $2000) with the following schedule of rates.
Schedule of Fees
- 0.5% charged on invoices 0-10 days outstanding
- 1% charged on invoices 11-20 days outstanding
- 1.5% charged on invoices 21-30 days outstanding
- 2% charged on invoices 31-40 days outstanding
- 2.5% charged on invoices 41-50 days outstanding
- 3% charged on invoices 51-60 days outstanding
Although the percent increase and the outstanding invoice period go up a consistent interval each time, this is not always the case. You might also see a tiered schedule that fluctuates more. For example, the percentage may only go up by .5% instead of 1% for some tiers and the time frame may increase by a different increment, such as 15 or 20 days.
Here’s what the tier schedule could look like:
Schedule of Fees
- 1.5% charged on invoices 0-30 days outstanding
- 2.0% charged on invoices 31-45 days outstanding
- 2.5% charged on invoices 46-60 days outstanding
- 3.5% charged on invoices 61-75 days outstanding
Notice the percentage goes up by .5% and then jumps up an extra 1% if the invoice is paid after 60 days. Also the first time increment is 30 days, but then additional fees are assessed every 15 days. A $2000 invoice paid after 31 days, but before 45 days would cost $50. This is a little more complex than the fixed schedule, but depending on when your customers pay can offer you better overall pricing.
Many factoring companies will allow you room to negotiate how you want to pay your fees. So it’s a good idea to run through some payment scenarios based on how your customers pay to determine which payment structure is most cost-effective for you.