Glossary · Factoring
Factoring fee
Also called: Discount fee, Discount rate, Factoring rate
Definition
The factoring fee, or discount, is what a factor charges to buy an invoice, usually a percentage of face value that can rise the longer the invoice stays unpaid.
Fee structures vary. A flat fee charges one percentage regardless of when the debtor pays. A tiered fee starts at a base rate for a first period, often 30 days, and adds an increment for each period after that. Many contracts add per-transaction charges for ACH or wire transfers, fuel advances, credit checks or monthly minimums.
Headline rates hide the real cost. A 3% fee on an invoice paid in 30 days works out to about 36.5% on a simple annualized basis (3% x 365 / 30), before any add-on fees. Carriers comparing offers should compare net cash and effective annual cost, which the factoring cost calculator shows.
For the factor, the fee has to cover cost of funds, debtor credit risk, fraud losses and the labor of verification. Pricing a recourse deal on a slow debtor the same as one on a fast debtor quietly gives margin away.