Don’t you love that feeling—you know, the one you get when an invoice pays? With invoice factoring, you don’t even have to think about processing invoices, and you can forget about having to wait 30, 60, or 90 days to receive your client’s payment. You can actually get paid today. When calculating the cost of invoice factoring, it’s important to remember the benefits it can provide to small businesses and to always consider your own business situation and goals.
The many benefits of invoice factoring
No more invoices to process, no waiting for clients to pay, and immediate cash in hand—invoice factoring services simplifies your bookkeeping experience and helps you get paid on time every time.
According to the Wall Street Journal, “The factor advances most of the invoice amount—usually 70% to 90%—after checking out the credit-worthiness of the billed customer. When the bill is paid, the factor remits the balance, minus a transaction (or factoring) fee.”
The benefits of invoice factoring are many, but how much does it actually cost? In this article, we’ll explain everything you always wanted to know about invoice factoring (but were afraid to ask).
Non-recourse factoring vs. recourse factoring
With non-recourse factoring, the factor assumes all the risk of collecting the debt. That’s a lower-risk option for small companies that can’t absorb the cost of unpaid invoices, but it does cost slightly more than recourse factoring.
Larger corporations often favor recourse factoring because, if a customer fails to pay, they can afford to return the funds they received from selling the uncollectible invoice to the factoring company.
Aside from the cost differential between the two, there are times when the cost differential is not justified by the credit risk being taken.
For example, if you’re selling to WalMart or the Federal Government, the chances of either one not paying because of credit reasons are quite small. Thus, paying a premium for non-recourse starts to look a little less attractive. If you do elect for non-recourse factoring, pay special attention to the Security Agreement that you’ll be required to sign and make sure you ask the factor to specifically go over when you will be covered and when you will not be covered from credit risk.
Whether you opt for a non-recourse or recourse factoring agreement, if your customer pays the invoice in 45 days or less, your total factoring cost with Triumph Business Capital would average approximately 3.9% of the invoice. However, different factoring companies determine what fees they’ll include, and these fees can drive up the cost of their services.
So how much does invoice factoring cost?
Fees vary from factor to factor, so check with your factor before getting started.
Application/Due Diligence Fee
Some factors charge this fee some do not. Those that do not may recover this upfront expense by increasing the initial financing fees. This fee varies highly from factor to factor and can cost anywhere from zero to thousands of dollars.
The factor retains a percentage of each invoice, typically 1–3%.
Monthly and Termination Fees
Some factors may require that you sell a certain amount of your invoice each month and sign a long-term contract. If the monthly target isn’t met, a minimum monthly fee will be charged. Terminating the contract early can trigger a cancellation fee—typically a percentage of your line of credit.
The cost of paying for your invoices in advance can vary anywhere from 1.5–5% of the invoice value each month. This wide disparity is yet another reason to check with your factor before jumping into a relationship.
If your invoices go beyond the 30–45 days covered by the advance discount fee, you can expect an additional charge of 2–3% or more for every 30 days that the receivable is outstanding beyond the original 30 days. Some factors may prorate the fee daily, while others may charge on a 10-day basis.
Triumph’s Factoring Fee depends on your unique factoring agreement. Our factoring experts considering whether you’ve chosen recourse or non-recourse factoring, the credit quality of your customers, and more. But in general, let’s say you decided to factor a maximum of $3,000 with a 95% advance rate over a 90-day repurchase period. Meaning, you’d get paid $2,850 within 24 hours of signing your factoring agreement, and the final 5%—minus standard factoring fees—after 90 days. In this scenario, you’re likely to see an initial 0.40% factoring fee totaling $12.
While the scenario we just presented is common, it’s important to remember that your factoring fee will vary depending on the terms of your factoring agreement.
How does Triumph Business Capital compare to other factoring companies?
Now that we’ve broken down the fees, let’s get into specifics. While not all factors are entirely transparent with their pricing, we’re an open book. The last thing we want to do is surprise you with a fee. Here’s how our pricing structure compares to other popular factors you may have heard of.
Other companies charge flat advance rates of 10–15% and $15 per wire, but offers free ACH transactions. Some don’t include a setup fee, but they charge a fee based on the advanced amount.
Triumph Business Capital, on the other hand, works with your business to fit your budget and requirements. Triumph takes into consideration the credit risk associated with your customers, the time it takes them to pay their invoices, and the monthly funding volume we forecast for your business.
Can invoice factoring save you money?
Consider this simple illustration. You decide that invoice factoring is the best option for your business, so you convert your invoices into cash instead of waiting a month or more to get paid.
With immediate cash in hand, you can stop worrying about how you’re going to pay your bills and get on with the growing your business. And when you pay vendors more quickly, you can take advantage of their discount offers, which saves you money. You’ve not only gotten invoice collection off your plate, you’ve paid your bills and saved money in the process—and that’s good business.
Calculate The Cost To You...
Let's take a look. Pricing for both options will vary considerably based on business size and other criteria - so feel free to enter the information most appropriate to you.
Your Effective Annual Interest Rate
Cash Advance Loans109%
Cash Available For Operations
The above calculations incorporate estimated values and are intended for comparative illustration purposes only. Terms and conditions of specific cash advance loan and/or factoring agreements may result in additional margin of error. If, for any reason, you suspect the results are not representative - please contact us directly so that we may address those concerns. Alternatively, the most accurate way to calculate the Annual Percentage Rate for a loan or competitive factoring facility may be to contact the financial service provider directly and request that they perform or confirm the calculations. Thank you.
Get paid today
The hardest part about your job shouldn’t be getting paid. Let Triumph Business Capital help you factor your invoices and get paid today.