Non-recourse factoring, on the other hand, means the invoice factoring company assumes the risk if your customer fails to pay. This being said, however, in this case, you’ll be responsible for the costs of this unpaid invoice and need to purchase the invoice back from the factoring company-in other words, pay the company for the total value of the invoice. This type of factoring is less risky for the factoring company, meaning you’ll often see lower factor rates.
In short, recourse factoring refers to invoice factoring in which you, the business owner, assume the risk if your customer fails to pay back the invoice. This being said, it’s important to keep in mind other types of fees that you may be charged, such as:įinally, when it comes to invoice factoring rates, you’ll also want to understand the difference between recourse and non-recourse invoice factoring. Overall, however, the factoring company will consider your business’s industry, invoice volume, customer payment history, among other qualifications to determine the specific factor rate they charge you. As an example, you may pay a 1% fee for the first week the invoice goes unpaid, but after the second week, this fee will grow to 1.5%. In this case, the longer the invoice goes unpaid, the higher fees you’re charged. Typically, these fees will range from 1% to 3%-but may reach as high as 5% of the total amount of the invoice.Īlong these lines, it’s also important to note that although many invoice factoring companies simply charge a flat factor fee for each week the invoice goes unpaid-others charge this rate on a tiered-structure. So, what do the rates typically look like for invoice factoring?Īs we mentioned, as opposed to the interest you’d pay with a traditional term loan, you’ll pay factor fees with this type of business financing. In this case, you’d end up paying a total of 6% in factoring fees-meaning of the $200,000 invoice, you’d only be receiving $188,000 at the end of the day-and pay a total of $12,000 in fees. On the other hand, however, you might find that the factoring company charges you an additional 3% processing fee. This being said, of the remaining $40,000 that the invoice factoring company held, you’ll only receive $34,000 back.Īll in all, then, you’ve received $194,000 of a $200,000 invoice. Therefore, the invoice factoring company will collect 3% in fees from the total invoice amount-$6,000. In this case, it takes your customer three weeks to pay the invoice. The factoring company charges a 1% factor fee on the total value of the invoice for each week it takes your customer to pay it. You receive $160,000 and the remaining $40,000 is held by the factoring company. You apply for invoice factoring and the factoring company agrees to advance you 80% of the invoice value upfront. Let’s say that you have an outstanding invoice of $200,000. With all of this information in mind, let’s break down an invoice factoring example to get a more comprehensive understanding of this type of financing. In essence, this means you’ll be charged a small percentage fee (usually 1% to 2%) on the total value of the invoice for each week it takes your customer to pay it.Īdditionally, in some cases, factoring companies will also charge a processing fee (usually around 3%) at the point of sale. Typically, invoice factoring companies charge their fees as factor rates. Once your customers have paid the invoices, the factoring company will transfer you the remaining percentage of funds, minus their fees. As we’ll discuss below, this is one of the inherent differences between invoice factoring and invoice financing. Then, the invoice factoring company will take over the responsibility for collecting on the outstanding invoices. Generally, factoring companies will be able to advance you up to 90% of the value of your invoices-and once they’ve verified the invoices-transfer you the funds in just a matter of days. Unlike a traditional term loan-where you receive a lump sum of capital that you pay back, with interest, over a set period of time-with invoice factoring, you sell your outstanding invoices to a factoring company in exchange for an advance of capital. Once again, as we mentioned above, invoice factoring is very different from many other types of financing. Now that we have a basic definition of what invoice factoring is, let’s take a more detailed look at how this type of business financing actually works.
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