How are fees and advances calculated in invoice factoring?

Several factors influence this:

  Fees usually range between 2-5% of the total invoice value. For instance, a 3% fee on a $1,000 invoice would be $30.

What does 'advance' mean in this context?

It's the money you get right away when we buy your invoice. Once your customer pays the invoice, you'll receive the balance. The advance can be anywhere from 60-95% of the total invoice value. For example, on a $1,000 invoice, an 80% advance is $800. When your customer pays the invoice, you'll get the remaining $200 (minus the factoring fee).

How does invoice factoring compare to bank loans?

At first glance, factoring might seem more expensive than a traditional bank loan. But it's worth addressing a few common questions or concerns:

A 3% monthly rate? That's 36% annually!

While it's easy to look at it that way, it's not an apples-to-apples comparison. Banks give you an annual interest rate, like 12%, on a loan. We buy your invoices at a discount. Plus, unlike a one-time loan from a bank, we continuously provide you with cash. Imagine if you factor $100,000 every month for a year. That's $1.2 million you can use throughout the year, compared to a one-off $100,000 bank loan. Even with a 3% factoring fee, your yearly cost is $36,000 (12 times $3,000), which is still only 3% of $1.2 million. And you have no debt at year's end!

I'm only making a 3% profit. How can I afford a 3% factoring fee?

Even if you're currently at a 3% profit margin, factoring could help you increase your business volume and hence your profit. As your business grows, your fixed costs (like rent and utilities) won't necessarily increase at the same rate. With higher sales volume and lower relative costs, your profit margin could go up.

How does the math work if I could double my sales with factoring?

Let's look at a simple example comparing scenarios with and without factoring:

Without Factoring

Monthly Gross Sales: $50,000
Cost of Goods Sold: $30,000 (60% of Gross Sales)
Monthly Gross Profit: $20,000 (40% of Gross Sales)
Fixed Expenses: $10,000
Variable Expenses: $8,500 (17% of Gross sales)
Factoring Fee: N/A
Total Expenses: $18,500 (37% of Gross Sales)
Monthly Net Profit: $1,500 (3% of Gross Sales)

With Factoring

Monthly Gross Sales: $100,000
Cost of Goods Sold: $60,000 (60% of Gross Sales)
Monthly Gross Profit: $40,000 (40% of Gross Sales)
Fixed Expenses: $10,000
Variable Expenses: $17,000 (17% of Gross Sales)
Factoring Fee: $3,000 (3% Fee)
Total Expenses: $30,000 (30% of Gross Sales)
Monthly Net Profit: $10,000 (10% of Gross Sales)

But don't I only get 80% of my money upfront?

Typically, the advance rate ranges from 80%-97%. Let's say the rate is 80%. If you factor $100,000 in January, you'd get $80,000 upfront. The remaining $20,000 consists of the fee (3%, or $3,000) and the reserve (17%, or $17,000). In February, you factor another $100,000 and get $80,000. Plus, you get the January reserve of $17,000 (assuming your customer pays within 30 days). So, in effect, you receive 97% of your money in February. This pattern continues in subsequent months.

What if my customers take longer than 30 days to pay?

No worries. You can either wait for 30 days before factoring the invoice or choose to factor invoices of customers who pay quicker to get the cash you need.