Factoring rates explained – Why 3% for 30 days doesn’t equate to 36% APR Interest

Factoring Rates Explained

Why 3% for 30 days doesn’t equate to 36% APR Interest. The belief that Accounts Receivable Factoring is too expensive, typically is based on the lack of understanding of what the actual factoring rates represent.

Factor Finance Companies (Factors) do not loan money at a rate of interest. They supply your growing business with working capital (and when you do well they do well). They do this by purchasing your invoice ‘receivable assets’ at a discount of the face value amount of the invoice. For this, factoring ‘rates’ represent a percentage discount in the sales transaction, not the traditional ‘bank style’ interest rate on a loan.

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Let’s take a look at an example;

If you have a $10,000 dollar invoice that is due to be paid by your customer 30 days from now, a factor may offer to buy the invoice for $9,700 dollars in cash, which is called the advance (and can be wired or ACH into your bank account within 24-48 hours) with the remaining balance being paid to you (less the factors fee) when the invoice is actually paid in full by your customer (called the debtor). Based on the scenario above, you would have agreed to discount your invoice by $300 dollars, or 3% of the face value.

The advance rate depends on what you have negotiated with the factor and some other key variables like the credit worthiness of your client,their payment history and the amount of the invoice. Usually the factor finance company will advance 80-90 percent of the face value of the invoice.

If a factor company tells you they will buy your invoice at a rate of 3%, that rate is not the interest rate on the loan, instead it’s the percentage discount the factor requires to get your business immediate cash today, for invoices they won’t collect on for 30 days.

Invoice financing is a strategic way to grow your business faster and will help cover payroll from additional employees, supplies, day-to-day expenses, investments and strategic overall business growth.

On average factoring discount rates range from .6% 1.4% for every 10 days an invoice remains outstanding from its original agreed upon due/payment date.

Factoring discount rates are transactional rates, where the amount of the discount is the factor finance company’s fee for the sales transaction – not that much different than the fees Credit Card companies charge merchants to advance them cash on their credit card sales.

A common misunderstanding about the costs associated with factoring arrises when financial professionals and business owners try to company interest rates to transactional rates. These two rates, as we’ve described are very different.


If you business sells $100,000 thousand dollars worth of invoices to a factor, and the factoring fee is $3000 dollars on invoices that are paid in 30 days; the tendency is to take the 3% fee – multiply it by 12 months and assume the factor is earning a whopping 36% return! That conclusion, however is false. The factor doesn’t collect $3,000 or 3% every month. The factor collects a 3% fee once, as the result of a single sales transaction. Same scenario if you were to discount your own service / product to your customer at a 3% discount.

Another way of looking at it – if you give your best customers a 3% price discount every month over the next year, does that mean you’ll have discounted your product or service by 36% by the end of the year? Of course not! If your profit margin on your product or services is 10% every month, your annual profit margin is still 10% annually.., not 120%!

Ask yourself – how much more money could your company make if you could recover your working capital immediately. On $100,000 dollars in “outstanding invoices” if your company could get $80,000 – $85,000 dollars within 24-48 hours, how much faster could your company grow.

In the examples above if your company’s net profit margin is greater than 3%. Any additional business you generate by accelerating your receivables provides your business with additional profits. You know the saying, we all know the saying – “it takes money to make money!” So if your business is generating invoices, that means you’re running a good business, it’s time to “Cash In” on your hard work so you have predictable cash flow every month to pay for additional employees to help you run grow your business, additional day-to-day expenses, supplies, investments, equipment and more.

Now that we know factoring can help your business grow at a much faster pace and become more profitable in less time, what’s the right factor finance company for your business type? Good question. Smart business owners use www.factor.bid to find the best factor in their industry and get the best rate when factoring.

Factor bid matches your business with the top factor finance companies that compete to buy your invoices for immediate cash. Before you decide which factor finance company to partner with, make sure and get the leverage you need to negotiate the best offer.  Factor bid gets you a few competitive offers to buy your accounts receivable invoices, so you get the best deal and most money when factoring your outstanding receivables.