When evaluating invoice factoring, many businesses focus on one number: the rate. But the true cost of invoice factoring includes more than just a discount percentage. Understanding the full cost structure helps you make an informed decision.
Advance Rate and Reserve Structure
Most factoring agreements include:
- Advance Rate: 70%–95% paid upfront
- Reserve: Remaining balance held until customer payment
The reserve protects the factor against disputes, short payments, or deductions.
Example:
$100,000 invoice
90% advance = $90,000 upfront
$10,000 held in reserve
Once paid, reserve is released minus fees.
Discount Fee Structure
The discount fee is the primary cost. It is usually expressed as:
- A percentage of the invoice
- Applied per 30-day period
For example:
2% for first 30 days
+0.5% for each additional 10 days
If your customer pays in 45 days, total fees increase accordingly.
Effective Annualized Cost
Because factoring fees are time-based, slower-paying customers increase your effective cost.
The faster your customers pay, the lower your true cost.
Additional Fees to Review
Some factoring contracts include:
- Wire fees
- ACH fees
- Credit check fees
- Monthly minimum volume requirements
- Lockbox fees
- Termination penalties
- Renewal clauses
These are not always highlighted upfront.
Recourse vs. Non-Recourse Pricing
Non-recourse agreements generally cost more due to added credit protection.
Understanding what risks are truly covered is essential.
Is Factoring Expensive?
Factoring is often more expensive than bank financing.
However, businesses must evaluate:
- Opportunity cost of not growing
- Payroll risk
- Lost contract opportunities
- Administrative savings
Sometimes the cost of delayed growth exceeds the factoring fee.
Final Thoughts
The true cost of invoice factoring depends on:
- Customer payment speed
- Contract structure
- Volume consistency
- Additional fees
Always evaluate total effective cost—not just the advertised rate.
