What is the Cost of Factoring?

The factoring cost depends on several variables: industry standard, risk and size of the invoice are among just a few of them. If your business is interested in getting a free factoring quote or has questions about the process in general, give us a call.

How Do Different Variables Affect Factoring Rates?

Various factors, such as volume, industry, and other variables, have a significant impact on factoring rates. Factoring rates typically range from 1.15% to 4.5% per 30 days. However, these rates are not fixed and can vary based on several factors.

Firstly, volume plays a crucial role in determining factoring rates. Higher volume businesses often have the advantage of negotiating lower rates due to the increased value of their invoices. On the other hand, smaller businesses with lower invoice volumes may have to bear higher rates.

Secondly, the industry in which a business operates also influences factoring rates. Certain industries, such as transportation and staffing, often have specific exceptions that lead to higher advance rates. In these industries, advances can even reach or exceed 90% of the value of the invoices. Understanding the specific requirements and risks associated with different industries helps determine the appropriate factoring rates.

Moreover, there are additional variables that can affect factoring rates. These variables may include creditworthiness, payment history, and the overall financial health of the business. A business with a strong credit profile and a reliable track record is likely to enjoy more favorable rates compared to a business with a poor credit history.

It is important to note that factoring rates and advances are not standardized and can vary significantly based on the aforementioned factors. Therefore, it is crucial for businesses to carefully evaluate their volume, industry, and other variables to determine the most suitable factoring rates for their specific circumstances.

Average Rates And Advances in Different Industries

The range of average factoring rates and advances varies for different industries. Here is a breakdown of the average rates and advance rates for some industries:

1. General Business: – Factoring rate: between 1.15% and 4.5% – Advance rate: between 70% and 85%

2. Staffing: – Factoring rate: between 1.15% and 3.5% – Advance rate: between 90% and 92%

3. Transportation: – Factoring rate: between 1.15% and 5% – Advance rate: between 90% and 96%

4. Medical: – Factoring rate: between 2.5% and 4% – Advance rate: between 60% and 80%

5. Construction: – Factoring rate: between 2.5% and 3.5% – Advance rate: between 70% and 80%

It is important to note that these rates are averages and may vary depending on factors such as the industry’s risk level, the complexity of transactions, and the volume of receivables. Generally, companies with lower risks and easy-to-manage receivables tend to receive lower factoring rates and higher advances. On the other hand, high-risk companies or those with receivables that require significant processing are likely to have higher factoring rates. For more detailed information on this topic, please refer to the subsequent sections.

What Factors Determine Client Risk?

Factoring companies assess client risk based on several factors. These factors include:

1. Industry: Different industries are perceived to carry varying levels of risk. Factoring companies gauge the industry you operate in to determine the structure of a proposal. Industries with lower risk, such as transportation, staffing, and consulting, often receive more favorable terms. Conversely, industries considered risky or requiring specialized knowledge, like construction and third-party medical paid healthcare, may be subject to higher rates and lower advances.

2. Credit quality of clients: The creditworthiness of your clients plays a crucial role in factoring companies’ risk evaluation. While it may not heavily impact your financing rate, it determines whether an invoice from a customer will be funded. Additionally, your clients’ creditworthiness influences the size of your financing line and the advance percentage you receive.

3. Business stability: The stability of your business is also a key factor considered by factoring companies. Companies with a long and stable operational history are seen as safe and consequently enjoy lower rates. Conversely, new companies or those with fluctuating sales are regarded as riskier and may be subject to slightly higher rates.

It is important to note that different factoring companies have varying approaches to risk evaluation. Some may be more willing to assume higher risks than others. However, the factors mentioned above generally assist factoring companies in assessing client risk and determining suitable financing terms.

What’s The Difference Between Flat Rates And Tiered Rates?

The difference between tiered rates and flat rates in factoring lies in the structure of the cost of financing. Factoring companies usually prefer to use a tiered rate structure, where the cost of financing is linked to the length of time an invoice remains unpaid. With a tiered pricing model, the longer the invoice remains outstanding, the higher the cost of financing becomes. Tiered rates are expressed in various formats, such as a percentage per specific number of days. For example, it could be 0.75% per 10 days, 1% per 15 days, or 2.50% per 30 days, with an additional 0.83% per 10 days after.

On the other hand, some clients negotiate a flat rate for factoring. In this case, the client pays a predetermined rate regardless of how long it takes for the invoice to be paid. The flat rate remains constant, regardless of the duration.

Both tiered rates and flat rates have their own advantages and disadvantages. The choice between the two depends on the specific situation and needs of the client. Generally, flat rates are favored when clients have customers who consistently make payments on predictable schedules. For instance, if all of a client’s customers typically pay within a 20 to 30-day timeframe or if they consistently pay within 45 days, the client might be offered a flat rate. In contrast, tiered rates are more suitable when there is a higher degree of uncertainty regarding the timing of customer payments.