How Much Does Invoice Factoring Cost?
Last time updated: 12 September, 2023
Last time updated: 12 September, 2023
Last updated on September 12th, 2023 at 03:49 pm
If you are looking into factoring as a financing option for your staffing firm, it can sometimes be difficult to determine just how much you will be paying for this service. This guide will help you understand what goes into factoring pricing so that you can make informed decisions for your business.
Invoice factoring is a service where a finance company will buy your outstanding invoices and advance you 80-90% of the total via ACH wire transfer. The rest is held in reserve until your customers pay their invoices, and then returned minus a variety of factoring fees. We’ll get into the specific fees later.
The “advance rate” you get as well as the fees are variable and depend on a variety of factors. They can also be confusing if you are not well versed in the field. That’s why we made this guide, to help arm you with knowledge and decode the industry jargon.
A fair question, given that we are making a whole guide on understanding the pricing. Factoring – also known as payroll funding, invoice factoring, A/R funding, etc – is actually an attractive option for many staffing firms given the cash flow negative nature of the business. While your customers may take 30-60 days or longer to pay their invoices, you have to pay your temporary workers weekly or biweekly. This can cause issues when you are in growth mode trying to take on more contracts, and therefore more employees. Factoring your invoices allows room for business growth.
While bank loan rates may seem more attractive on the surface, there are several reasons staffing firms might choose to go the factoring route instead.
Read more on staffing loans.
Factoring companies look at many data points when assessing their risk of working with you. When factors are giving you a quote for their services some of the most important criteria for determining your rate are:
At the end of the day, every organization is about people: those who work with us and those we serve. So, when adversity arises, the human element should take priority over business and industry. It really is that simple.
To keep things simple, we’re going to lay out a scenario and show you what you might pay under those circumstances.
ABC Staffing is facing difficulties when it comes to making payroll each week. Instead of waiting 30 days for their client, TGIF, to pay their $10,000 invoice, they reach out to Factoring Co for a quote. Factoring Co offers ABC Staffing a 90% advance rate, a 1% admin fee, and a .02% daily rate.
Let’s break down the math.
Remember that funding tends to be based on payroll needs, and you choose the frequency. Some people fund every week, some people fund bi-weekly and others monthly. It can be variable to meet your needs.
Like any specialized industry, factoring comes with its own lingo and terminology. Here are some common terms and their definitions so you know what your potential partners are talking about.
The percentage measure of the amount you receive (usually by wire transfer or ACH) in cash when factoring an invoice. Advance rates typically range from 80% to 90% of your invoice amount.
If you were factoring a $10,000 invoice at a 90% advance rate, you would receive $9,000.
The amount a factoring company will retain as a percent of your invoice after giving you initial cash in advance.
If you were advanced $9,000, your reserve equals the balance of $1,000. Once the invoices are paid, if there are no issues or unpaid fees, you will get back the $1,000 minus the factoring fees.
A small daily fee for each day your invoice is outstanding as a percent of the invoice. Therefore, the longer your customer takes to pay, the more you will pay in fees. Percent charges range widely from factoring company to company.
The fees a factoring company charges on your invoice amounts. Factoring fees can include daily fees, incremental fees, and admin fees. You may be able to arrange your fee structure (daily vs. admin) to fit your business/billing structure.
The factoring fees you might encounter include the daily dee, incremental fee, and admin fee (see below for more details).
Get notified about the latest AP blogs and resources on staffing topics
Strictly Necessary Cookies should be enabled at all times so that we can save your preferences for cookie settings.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.