Last Updated on August 26, 2021
Specialty lenders often use the terms Accounts Receivable Financing and Factoring interchangeably. At altLINE, we purposefully differentiate between the two with distinct structures. Whatever a lender may call it, there are certain things to keep in mind when evaluating options.
How are Accounts Receivable Financing Rates Determined?
Similar to other A/R based lines, your Accounts Receivable Financing rates will be impacted by:
The Size of the Borrowing Need:
The more money being borrowed, the easier it is for the lender to recoup fixed costs associated with the line. This results in a lower all in rate.
Average Days Sales Outstanding:
This is simply a more complicated way of saying “how long it takes for a business to get paid.” The longer the conversion cycle from invoice to cash, the bigger the impact on the service fee.
The Credit Quality of the Customer Base:
Businesses whose customers have stronger credit profiles typically benefit in the form of lower rates. Customers with poor credit may prevent your business from getting approved for invoice factoring.
Here’s an Example:
A B2B staffing business sells its outstanding invoice ($100,000) to a factoring company, which in turn advances 90% of the invoice face value to the business. Their contract states the factoring company will charge a 3% fee for the first 30 days, after which smaller fee (for example, 0.5%) is added on every 10 days past the initial 30 that the invoice remains unpaid.
If the customer pays the invoice within the first 30 days, the staffing business would pay a factoring fee of 3%, or $3,000. If the customer pays the invoice between 31-40 days, the staffing business would pay a factoring fee of 3.5% or $3,500.
Accounts Receivable Financing Fee Structures:
At altLINE, there are two primary costs associated with our Accounts Receivable Financing program. These include the service fee and the interest rate.
The service fee is stated as a percentage and is applied to the face value of the invoice that’s being processed. Once an invoice is processed, the advanced portion of funds are made available for a client to borrow against.
The second component of the fee structure is the interest rate. Like a traditional line of credit, interest is only charged when funds are borrowed from the pool of invoices that have been processed. This interest is accrued over the month and paid at the end of each month from the inflow of payments from customers.
Average AR Financing Fees
Note: These are average rates. Rates may differ for individual businesses based on credit history, industry or other factors.
|Industry||Factoring rate||Advance rate|
|General B2B Businesses||1.15% – 4.5%||70% – 85%|
|Staffing||1.15% – 3.5%||90% – 92%|
|Transportation||1.15% – 5%||90% – 96%|
|Medical||2.5% – 4%||60% – 80%|
|Construction||2.5% – 3.5%||70% – 80%|
How to Avoid Being Ripped Off
If you’re working with a new AR financing provider, make sure to read your factoring agreement carefully. Some providers will try to hide additional fees behind a lower rate – like termination fees, monthly minimums, maintenance fees, float and others. Once a provider gives you a quote, compare that to what you’ve read in this article, or shop around for a couple other quotes to ensure you’re getting the right deal. If you feel like the factoring company is being shady, they probably are!
Looking for a trustworthy factoring company to help your business secure accounts receivable financing? Apply today to get your free quote and talk to a sales representative from altLINE.
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.