Factoring Buyer's Guide

Pricing

The cost of factoring is based on the discount rate – how much the factor will take from your accounts receivable after they are paid in full. It can range from 1% to 5%, but is most commonly 3% to 5%.

The discount rate for factoring services is a composite of several elements:

• Volume: Multiple invoices with higher values can get you better discount rates than fewer invoices because it's less work for the factor.
• Customer base: If your invoices are for high-quality, credit-worthy clients, the factor may provide a more favorable rate.
• Industry risk: The discount rate could be higher based on the industry you work in. Factoring invoices from garment industries, for example, will require a higher rate than from manufacturing plants because it's riskier which makes it difficult to secure loans. Also, factoring for businesses in the medical and construction industries may only provide 70% up front with a discount rate closer to the high-end due to the higher risks associated with billing recovery.
• Client credit history: Unlike business loans, factoring puts more importance on your clients' credit status than on yours. And if your clients have a sketchy credit history, it may not disqualify you as a factoring candidate but it could increase your rate to cover the factor's added risk.
• Billing considerations: Progress billing usually requires a higher factor fee since it requires more upkeep and communication with vendors than non-progress billing. Non-recourse factoring may cost more since the factor is taking on considerably higher risk.

Incremental pricing
Pricing for factoring services is typically set in 30-day increments. You pay the agreed-upon discount rate to cover the first 30 days of the factor's service which starts immediately after the factor validates the invoices. You will also pay additional daily fees for every day the outstanding invoices are not paid during the initial 30-day period.

If your clients tend to pay their invoices quickly, you may want to take advantage of "block pricing." With block pricing, you pay a slightly higher discount rate but are charged less for bills that are paid in less than 30 days. With a typical increment of 10 days, for example, invoices that are paid in the first 10 days will only get charged one third of the 30-day discount rate. If your monthly invoices total hundreds of thousands of dollars, you may even qualify for daily increments for maximum savings.

The following demonstrates how much one can save on factoring services if the factor offers incremental pricing. In this example, the company wants to factor $200,000 in total invoices.

Increment	Discount Rate	Days until client pays invoices	Total factor fee
Per 30 Days	3%	27	$6,000
Per 30 Days	3%	6	$6,000
Per 10 Days	3.10%	27	$6,200
Per 10 Days	3.10%	15	$4,133
Per 10 Days	3.10%	6	$2,067
Per Day	3.25%	27	$5,850
Per Day	3.25%	18	$3,900
Per Day	3.25%	9	$1,950

Set-up costs
A factor may charge a one-time fee to get your account started. Set-up fees can run the gamut from $500 for a basic application fee to $2,000 to $3,000 for the application along with due diligence such as tax lien inquiries, credit report searches, and invoice validation. There may also be a one-time brokerage fee of 0.5% to 3% to pay a broker that referred the business. Make sure you get a detailed list of the fee schedule before you work with a particular vendor.

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