How invoice factoring works
You sell an unpaid invoice to a factoring company. It advances most of the invoice value straight away, typically 80% to 95%, and holds the rest as a reserve. When your customer pays the invoice, the factor releases the reserve to you, minus its fees.
fees = invoice × fee rate × number of fee periods + other fees
rebate = invoice − advance − fees
effective APR = fees ÷ advance × 365 ÷ days outstanding
The APR uses the cash you actually received, not the invoice value, because that is the money you had the use of. It is a simple annualised rate, the same convention competitors and lenders use to compare short-term finance.
Worked examples
Flat fee: a $50,000 invoice with a 90% advance and a 3% flat fee, paid in 45 days. You get $45,000 now, pay $1,500 in fees, and receive a $3,500 rebate. That is 27.0% APR.
Weekly fee: the same invoice at 1% per 7 days. Forty-five days is 7 started weeks, so the fees are $3,500 and the APR is 63.1%. A 1% weekly rate sounds cheaper than a 3% flat fee, but slow-paying customers make it far more expensive.
Factoring vs a loan or merchant cash advance
Factoring is priced on how long your customers take to pay, not on your credit score, which makes it easier to get than a bank loan. The effective APR usually lands between a term loan and a merchant cash advance. Compare your offer with the business loan calculator and the MCA factor rate to APR calculator.
Frequently asked questions
How much does invoice factoring cost?
Factoring fees typically run from about 1% to 5% of the invoice, either as one flat fee or charged per week or per 30 days until your customer pays. Add application, wire or monthly minimum fees on top to see the full cost.
How do I convert a factoring fee to an APR?
Divide the total fees by the cash you were advanced, then multiply by 365 divided by the number of days until the customer paid. A 3% fee on a $50,000 invoice with a 90% advance, paid in 45 days, is $1,500 on $45,000 for 45 days: about 27% APR.
What is the reserve in invoice factoring?
The part of the invoice not advanced up front, often 5% to 20%. When your customer pays the factor, you receive the reserve minus the factoring fees as a rebate.
Why does factoring get more expensive when customers pay late?
With time-based pricing the fee is charged again for every week or 30-day period the invoice stays unpaid, so a customer who pays in 60 days instead of 30 can double the fee.
What is the difference between factoring and invoice financing?
With factoring you sell the invoice and the factor usually collects from your customer. With invoice financing you borrow against the invoice and collect payment yourself. The cost maths is similar, so this calculator works for both.