Factor Rates vs. APR: Understanding the True Cost
Invoice factoring companies often quote a factor rate (a flat percentage like 3%) rather than an APR (Annual Percentage Rate). This can be misleading because the actual annualized cost depends heavily on how long your customer takes to pay. A 3% fee on a 30-day invoice translates to a 36% APR, but on a 60-day invoice, it's only 18% APR.
| Metric | Factor Rate (Flat Fee) | APR (Annualized) |
|---|---|---|
| Definition | One-time fee charged on invoice value | Annualized cost if fee repeated all year |
| Example: 3% on $10,000 | $300 fee (fixed) | 36% APR if paid in 30 days |
| Time Sensitivity | Same fee regardless of days | APR decreases as days increase |
| Best For Comparing | Same factor over time | Comparing to traditional loans |
Advance Rates: What to Expect by Industry
The advance rate is the percentage of the invoice you receive immediately. Factors hold back a reserve (typically 10-20%) until your customer pays. Advance rates vary significantly by industry based on risk profiles:
- Trucking & Transportation: 90-97% advance rates. This industry has the highest rates because freight invoices are straightforward with verified delivery receipts.
- Staffing & Temp Agencies: 85-92% advance rates. Recurring payroll cycles create predictable cash flow for factors.
- Manufacturing & Distribution: 80-90% advance rates. Depends on customer creditworthiness and dispute history.
- Construction & Contractors: 70-85% advance rates. Lower rates due to lien rights, change orders, and payment disputes. Some factors avoid construction entirely.
- Government Contracts: 80-90% advance rates, but slower payment (60-120 days typical). Requires specialized factors familiar with DFAS/SAM.gov.
Hidden Fees to Watch For
The quoted factor rate is rarely the only cost. Before signing any agreement, ask about these common additional fees:
- ACH/Wire Fees: $15-50 per funding. Some factors charge every time they send you money.
- Invoice Processing Fees: $1-5 per invoice submitted. Adds up fast for high-volume businesses.
- Minimum Volume Fees: $500-2,000/month if you don't factor enough invoices. Common in long-term contracts.
- Early Termination Fees: 1-3 months of fees if you exit the contract early.
- Credit Check Fees: $25-50 per debtor to verify your customer's creditworthiness.
- Renewal Fees: Some factors charge annual renewal or "account maintenance" fees.
Small Business Eligibility Checklist
Invoice factoring has fewer requirements than traditional bank loans. Most factors evaluate your customers' credit, not yours. Here's what you typically need:
✅ Eligibility Checklist
- ☑️ B2B Invoices Only: You sell to other businesses (not consumers).
- ☑️ Creditworthy Customers: Your customers are established businesses with good payment history.
- ☑️ Net Terms Invoices: You invoice with Net 30, Net 60, or similar payment terms.
- ☑️ No Existing Liens: Your receivables aren't already pledged as collateral to another lender.
- ☑️ Clean Invoices: Invoices are for work already completed—no progress billing or deposits.
- ☑️ No Concentrations (Preferred): No single customer represents more than 50% of your volume.
Frequently Asked Questions
How is factoring different from a bank loan?
Bank loans create debt on your balance sheet and require monthly repayments regardless of cash flow. Factoring is not a loan—you're selling an asset (the invoice) at a discount. There's no debt, no monthly payment, and approval depends on your customers' credit, not yours. This makes factoring accessible to startups and businesses with poor credit.
Does invoice factoring hurt my credit score?
No. Standard invoice factoring does not appear on your credit report because it's not a loan. However, some factors may file a UCC-1 lien on your receivables, which can be seen by other lenders. This lien doesn't affect your personal credit score but could impact your ability to get other asset-based financing.
What is the typical cost per $10,000 invoice?
With a typical 3% factor rate and 90% advance, factoring a $10,000 invoice would cost $300 in fees. You'd receive $9,000 upfront (90% advance), then $700 when your customer pays ($10,000 - $9,000 - $300 fee = $700 reserve returned). If paid in 30 days, the effective APR is about 40%. Lower volume or riskier industries may see rates of 4-5% ($400-500 per $10,000).
Recourse vs. Non-Recourse factoring explained
Recourse factoring: If your customer doesn't pay, YOU must buy back the invoice
or replace it with another one. Most factors use recourse agreements because it shifts default
risk to you.
Non-recourse factoring: The factor absorbs the loss if your customer goes
bankrupt (credit risk only). Non-recourse does NOT cover disputes or slow payment—only verified
insolvency. Non-recourse comes with higher factor rates (1-2% more) due to increased risk for
the factor.
How long does it take to get funded?
Initial setup takes 3-7 business days while the factor verifies your business and your customers' credit. After that, funding is typically same-day or next-day. You submit an invoice in the morning, and funds hit your account by afternoon. Some factors offer 2-hour funding for established clients using their online portals.