How are the fees and advance rates of invoice factoring calculated?

They are based on a few things:

  The fees generally vary from 2-5 % of the invoice's total amount.

For instance, if your invoice is worth $1,000, a 3% fee would be $30.

What does 'advance' mean?

It's the cash you get right away when we buy your invoice. The remainder comes back to you when your customer settles the invoice. Advances are typically between 60-95% of the invoice's total amount.

As an example, if your invoice is worth $1,000 and the advance rate is 80%, you'll get $800. The rest, minus the factoring fee, is given back to you when the customer pays.

How does Invoice Factoring compare to Bank Lending Rates?

  At first glance, invoice factoring may seem more expensive than bank rates. However, here are some common concerns that potential clients might have.

Wait, 3 points per month? That's 36% per year!

While it might be tempting to calculate the annual rate, this isn't a fair comparison. Banks offer loans at an annual interest rate while we purchase your invoices at a discount. These are two different types of products, so it's not a straight-up comparison.

With a bank loan, you get the money once. With factoring, you get money continuously. Let's say you have a $100,000 loan from the bank with 12% interest. You get $100,000 once and then pay $1,000 interest per month, but you still owe the $100,000. However, with factoring, if you factor $100,000 each month for a year, you'll have access to $1.2 million throughout the year. Your total fees for the year might be $36,000, but that's only 3% of $1.2 million. Plus, you don't owe any debt at the end of the year.

My profit is only 3%, how can I afford your 3 points?

  A business making just 3% profit can boost their volume with factoring, leading to higher profit margins. The reason is that your fixed costs (like rent and insurance) don't usually rise with volume. Thus, more business means higher profits.

Let's break this down with an example. Let's assume you can double your sales:

Without Factoring

Monthly Sales-$50,000
Cost of Goods Sold-$30,000 (60% of Sales)
Monthly Gross Profit-$20,000 (40% of Sales)
Fixed Expenses-$10,000
Variable Expenses-$8,500 (17% of Sales)
Factoring Fee- None
Total Expenses-$18,500 (37% of Sales)
Monthly Net Profit-$1,500 (3% of Sales)

With Factoring

Monthly Sales-$100,000
Cost of Goods Sold-$60,000 (60% of Sales)
Monthly Gross Profit-$40,000 (40% of Sales)
Fixed Expenses-$10,000
Variable Expenses-$17,000 (17% of Sales)
Factoring Fee-$3,000 (3% Fee)
Total Expenses-$30,000 (30% of Sales)
Monthly Net Profit-$10,000 (10% of Sales)

But I only get 80% of my money upfront!

It's true that the advance rate is usually between 80% and 97%. For instance, if you start factoring in January with $100,000, you'd get $80,000 upfront, and the remaining amount would cover the factoring fee (3%) and the reserve (17%).

In February, if you factor another $100,000 and receive $80,000, plus the January reserve of $17,000 (assuming your customer pays within 30 days), you actually get 97% of your money, not just 80%. So, from the second month onward, you're essentially receiving 97% of your cash flow.

But what if my customers take longer than 30 days to pay?

  You have some choices here. For example, if your client typically pays in 60 days, you could wait 30 days before factoring the invoice, meaning you'd only pay a 30-day fee. Another option is to factor invoices from faster-paying customers first to get the cash you need.