Every factoring company does things a bit differently. In order to better equip borrowers in evaluating their options, we’ve put together a helpful guide that cuts through the noise.
How are Factoring Rates Determined?
For most factoring companies, the primary drivers in determining a client’s rates are:
- The Dollar Volume of Invoices Factored: Like most businesses, economies of scale are at play for factoring companies as well. Many of the costs associated with establishing and maintaining a factoring relationship are fixed in nature, so the more a factoring client utilizes its line, the lower their rates will be.
- The Length of Time an Invoice is Outstanding: Factoring companies must account for the time value of money. The longer a factored invoice remains unpaid, the higher the factoring fee will be in order to account for their money being out the door.
- The Credit Quality of the Debtor: With the factoring company analyzing the likelihood of repayment on factored invoices, they’re really evaluating the credit of a business’s customers. Better debtor credit often equates to lower factoring fees for the seller of an invoice.
Factoring Fee Structures:
Factoring costs are predominately based on the factoring fee. This fee is sometimes referred to as a processing fee, discount fee, or service fee.
The factoring fee is stated as a percentage and is assessed to the face value of an invoice when an invoice is paid. The fee is based on a rate structure established at the outset of the factoring relationship and the fee typically increases as an invoice ages and remains unpaid.
The two most common factoring rate structures are what we refer to as tiered rate structures and daily rate structures.
Tiered rate structures mean the factoring fee increases every ten to thirty days the invoice stays outstanding. In contrast, daily rate structures mean the factoring fee increases every day the invoice ages, albeit by a much smaller increase compared to a tier structure. To calculate the factoring fee with a daily rate structure, simply multiply the daily rate by the number of days the invoice was outstanding.
In the example below, an invoice aged 42 days would be charged a 2.5% discount in the tiered rate structure and a 2.1% discount in the daily rate structure.
Example Tiered Structure
At altLINE, we do our best to keep things straightforward and transparent. As such, the majority of our factoring engagements consist of the factoring fee alone. That’s not the case with all factoring companies, so be sure to keep an eye out for some of these ancillary fees:
- ACH Fee: This is a transaction fee that factoring companies may choose to assess anytime funds are transferred via ACH. It typically ranges between $5 and $30. ACH fees should be negotiated out of contracts.
- Wire Fee: In the event a borrower needs access to funds immediately, most factoring companies can issue a wire as opposed to an ACH. Factoring companies are charged a wire fee by their lender or the Federal Reserve and those fees are often passed through to the business.
- Lockbox Fee: Sometimes referred to as a monitoring fee, the lockbox fee is a monthly fee ranging from $250 – $1,000/month. For most invoice factoring relationships, a lockbox fee should not be necessary unless it comes with significantly reduced factor fees.
- Monthly Minimum Volume Fee: This fee is only applied should the company not factor a pre-determined volume of invoices (measured in dollars) in a given month. High monthly minimum fees can increase overall costs and limit the financing flexibility of the borrower.
- Unused Line Fee: This fee is typically reserved for larger transactions and not as common as other fees listed. It is a percentage fee applied to the average unused portion of the overall line for a given month.
- Renewal Fee: Many factoring companies charge an annual renewal fee that is equal to a percentage of the overall line size. Don’t get caught off guard at renewal time and be sure to negotiate this fee out when possible.