A factoring rate is a scale used by factoring firms who buy commercial invoices at a discounted price. The factoring rate is the rate of the discount, usually based on your customers’ credit strength and the amount (volume) of invoices you wish to sell the factoring firm. This rate can average anywhere from less than one-percent to around 5%, depending on the circumstances. Factoring rates are generally therefore quoted as a percentage of the invoice amount, rather than an annual percentage rate. Since the factoring company cannot determine how long it might take to receive payment on a factored invoice, it is impossible to determine the true annual percentage rate on a factoring transaction on the date of purchase, especially if the factoring rate is a “flat rate”. With a flat factoring rate, the equivalent “annual percentage rate” decreases the longer it takes for the factoring company to receive payment from your customer. The opposite is true the shorter it takes.
Generally, the factoring company will pay out anywhere between 95% and 100% of the invoice amount, minus a corresponding discount fee. Discount fees (or the factoring rate) may generally be anywhere between 1% and 5% of the invoice amount. The factoring rate depends on your business’ circumstances, how reliable your customers are, and the dollar amount of invoices the factoring company believes you will sell them. The obvious upside of this is that you can use just the business that you have already done with your customers as a way to fund your business immediately rather than taking on large sums of debt or waiting for the debts owed to you to be paid.
Factoring rates vary just as interest rates do. Factoring firms, however, allows businesses who are reluctant or not eligible to use traditional means of financing an option to pump some cash flow into their business within days.