Factoring: Understanding the True Costs

In a previous article we talked about loans versus leases, now we will talk about the cost to factoring your invoices.

Because factor financing is short term (usually 30-45 days), you will not see an annualized percentage rate ("APR") published. However, you should know the true cost of your periodic factoring.

Key Terms to Understand

Recommended Partners

Rotessa Partner

Payment processing

Code: HOMETIME 30

Disclosure: We may earn a commission if you sign up through these links. This helps support our content.

Advance rate: The percentage (%) of the face value amount of accounts receivable the Factor will advance to you. Example: $10,000 (A/R) x 80% advance rate = $8,000 (Advance)

Discount rate: The percentage (%) of the face value amount of accounts receivable the Factor will charge you. Example: $10,000 (A/R) x 3% discount rate (for 30 days) = $300 (Discount Fee)

Term: The number of days your advance remains outstanding.

The True Cost

Your annual interest rate appears to be 36% based on the discount fee of 3% for 30 days. However, when you consider that you only received $8,000 not $10,000, your APR is actually 45% (and even higher if your receivables take longer than 30 days to pay).

Alternatives to Factoring

• Traditional bank and credit union lines of credit
• Community Development Financial Institutions ("CDFIs")
• SBA loans up to $250,000

If you are a small business owner in need of business working capital, avoid the high cost associated with factoring by exploring alternative, lower cost financing options.