A Factoring Loan

Although each factoring institution may vary their rate structure and criteria somewhat, there are usual and customary guidelines for the calculating of your factor fee and advanced funding percentage. Below you will find information on the most common and customary basis for figuring invoice factoring funding terms and rates. 

The main point to understand when analyzing the fairness of your factoring terms, (the factoring fee and advanced funding percentage) is the financial strength and credit worthiness of your customers.  It is NOT the profitablility or even credit standing of your business that impacts your factoring terms!  Since it is your accounts receivable that a factor purchases, the factoring terms are exclusively based on your invoiced customers ability to make payment.

Factoring rates can also vary on the total dollar amount you intend to factor on a monthly basis.

 BELOW IS AN EXAMPLE OF A TYPICAL FACTORING FEE STRUCTURE

Advanced Funding
When you send in an invoice to be factored (also known as invoice factoring), you will typically receive between 80% and 90% funding of the invoice amount within 24 hours after the invoice has been verified (depending on the invoice amount and the business paying the invoice). This is your advanced funding, its your money, you may spend however you want. Advanced funding is wired to your business bank account.

Factoring Fee
Factoring fees are "OPTIMAL" for your business when they are based on a Per Diem rate.  The "average" Per Diem factoring fee is between 0.095% and 0.085% (per day), that's less than 1 tenth of 1 percent per day.

EXAMPLE:  FOR A PER DIEM RATE OF .085% - per day:

Payment in 15 days would yield a discount rate (factoring fee) of 1.3%
Payment in 30 days would yield a discount rate (factoring fee) of 2.6%
Payment in 90 days would yield a discount rate (factoring fee) of 7.7%

There are some factoring companies that may impose factoring fees based on a "per 30 days rate" (such as 2.6% per 30 days). Their are obvious negatives to this fee structure.  If your customer pays the factor in 15 days on an invoice, instead of "only" incurring a 1.3% fee on that invoice (Per Diem example above) your fee is 3%.  Conversely, if paid in 35 days, instead of paying 3% in the Per Diem example, you would pay 5.1% in the Per 30 days rate (a total charge of 60 days). 

Per Diem fee structures are desirable as you only pay for each individual day the factor owns the invoice, no more, no less.

Make sure you know how your terms are structured and what criteria is used to calculate your company's rate charges with a factoring institution.

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