Invoice factoring fees pay for advancing cash against an invoice and collecting it. Most fee structures depend on the invoice amount and how long the invoice stays outstanding, and some providers add other charges. The best way to compare providers is to work out the total cost on an invoice like the ones you actually send.
The main fee
The core fee is usually a percentage of the invoice's value, and it generally reflects how long the invoice stays outstanding. Some providers charge a flat fee for a set period, and others step the fee up as an invoice ages. Either way, the longer a customer takes to pay, the more the invoice tends to cost to factor.
That is why your fastest-paying customers are usually the cheapest invoices to fund, all else equal. It also means two providers with similar headline fees can cost very different amounts on the same invoice.
Other charges to ask about
Not every provider charges all of these, so ask directly whether any apply:
- Application, setup, or due diligence fees.
- Minimum monthly volume or minimum fees if you factor less than a set amount.
- Per-invoice or processing fees, and charges for each payment received.
- Bank transfer or wire fees when funds are sent to you.
- Fees for invoices that stay unpaid past a certain age.
- Termination or early exit fees if you end the agreement before the contract term.
The advance rate and reserve are not fees
The advance rate is how much of an invoice you receive up front, and the reserve is the part held back until your customer pays. Neither is a cost by itself, because the reserve comes back to you, less fees and any adjustments. Our guide to what an advance rate is explains how the pieces fit together.
How to compare total cost
- Pick a realistic invoice: the amount, your customer's payment terms, and how long that customer actually takes to pay.
- Ask each provider to list every charge that would apply to that invoice, in writing.
- Add them up for the period the invoice is outstanding, and compare the totals instead of the headline rates.
- Factor in the contract terms, including any minimums, the length of the commitment, and how you can exit.
What changes your cost
- Your customers' credit and payment history. Strong, prompt payers are cheaper to fund.
- Invoice size and volume. Providers may price larger or steadier volume differently.
- Concentration. Heavy reliance on one customer can change how a facility is structured.
- Your industry. Typical payment terms and documentation vary by industry, which can affect cost.
Is factoring worth the cost?
Compare the fee with what the cash lets you do. That might be making payroll on time, taking an order you would otherwise turn down, or avoiding the cost of paying a supplier late. It also needs a margin that can absorb the fee, so check the math on thin-margin work before relying on it.
If cash timing is the problem and the fee fits your margin, factoring can pay for itself. If you only need cash occasionally, an A/R line of credit may fit better, because you draw only when you need it. Our guide on invoice factoring vs. an A/R line of credit walks through the choice.