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.
Invoice Factoring Rate Example
Let’s say that you use the tiered fee structure that is outlined in the table below. In this structure, your initial fee amount is 1.5%, and your incremental fee is 0.50% every 10 days. But what does this actually mean? The amount you are charged depends on when your customer pays the invoice. We’ve outlined a few payment scenarios below to illustrate:
- If your customer pays the outstanding invoice within the first 30 days (which is the initial fee period), you will only be charged 1.5% of the invoice face value.
- If your customer pays the invoice on day 35 of it being outstanding, you will be charged 2.0% of the invoice face value because the invoice has then aged into the next fee tier.
- If your customer pays the outstanding invoice on day 75, you will be charged 4.0% of the invoice face value.
As you can see, the quicker your customer pays the invoice, the lower the factoring rate is. Under traditional Net 30 payment terms, you are typically in a good position to get your invoices paid before larger incremental fees are applied.
Example Tiered Structure
| Invoice Age | Rate |
|---|---|
| 0 – 30 Days | 1.5% |
| 31 – 40 Days | 2.0% |
| 41 – 50 Days | 2.5% |
| 51 – 60 Days | 3.0% |
| 61 – 70 Days | 3.5% |
| 71 – 80 Days | 4.0% |
| 81 – 90 Days | 4.5% |
Typical Factoring Fees
At altLINE, we do our best to keep things straightforward and transparent. As such, we try to charge fewer fees than what other factoring companies charge. We’ve outlined some of the most common ancillary fees below for you to keep an eye out for:
- 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, but altLINE does not charge for ACH transfers. ACH fees should be negotiated out of factoring 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. At altLINE, we charge $30 per wire transfer.
- Initial Filing Fee / Origination Fee: An initial filing fee (or origination fee) is charged to process the invoice factoring application. These fees can range greatly from 0% to 3% of the credit line amount. altLINE typically charges $350 – $500 for the initial filing fee, but we will occasionally charge up to 1% of the credit line amount. However, we will not charge the fee until after you have been funded, so you do not need to worry about paying an application fee with the risk of not being approved.
- Float Days: While not technically fees, float days are a time allowance for check clearance that most factoring companies work into their contracts. This time allowance can bump you into the next tier of fees in an incremental rate structure, which can result in you being charged more. altLINE does not include float days in our contracts.
- Lockbox Fee: Sometimes referred to as a monitoring fee, the lockbox fee is a monthly fee ranging from $50 – $1,000 per 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 invoice factoring 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.
- Monthly Access Fee: Some companies will charge a monthly access fee to access the provided software. These fees can get pretty costly, but altLINE does not charge a monthly access fee.
- Credit Approvals: Credit approvals are common to see in invoice factoring contracts and can cost anywhere between $35 and $100 per credit check on your debtors. However, altLINE does not charge for credit approvals.
- 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.
Compare Invoice Factoring Rates
For a general comparison of what fees to expect with altLINE compared to other factoring companies, check out the table below. Note that while our fees generally fall within the ranges included, we customize our rates for each customer, so your fees may vary from what you see below.
| altLINE | Other Factoring Companies |
|---|---|
| Advance Rate: 80% – 90% | Advance Rate: 80% – 90% |
| Initial Fee: 0.25% – 2.5% | Initial Fee: 0.5% – 3.0% |
| Incremental Fees: 0.25% – 1.0% | Incremental Fees: 0.5% – 1.0% |
| Initial Filing Fee/Origination Fee: Typically $350 – $500 | Initial Filing Fee/Origination Fee: 0% – 3.0% of credit line amount |
| Days to Fund: Same day available | Days to Fund: 2 – 5 days |
| Float Days: None | Float Days: 3 – 5 days |
| ACH Fees: None | ACH Fees: $5 – $30 per transaction |
| Wire Fees: $30 | Wire Fees: $15 – $30 |
| Lockbox Fee: None | Lockbox Fee: $50 – $1000 per month |
| Monthly Access Fee: None | Monthly Access Fee: Up to $300 |
| Credit Approvals: $0 | Credit Approvals: $35 – $100 |
| Same Day Funding Fee: None | Same Day Funding Fee: 1% |
| Renewal Fee: None | Renewal Fee: Varies |
