What is a factoring rate?

A factoring rate, also called the discount rate, is what a factor charges to advance cash against an unpaid invoice. If the rate is three percent on a $10,000 invoice, the factor advances $9,700 immediately and collects the full $10,000 from the customer when they pay. The rate covers the factor's cost of capital, credit risk, and collection costs. Rates vary based on the creditworthiness of the invoiced customers, the volume of invoices, and how long those invoices typically take to pay.

Factoring rates are often quoted per month rather than as an annualized figure, which makes them harder to compare to other financing costs. A one-percent-per-month rate is roughly equivalent to a 12 to 14 percent annual cost before compounding. For businesses with creditworthy customers and standard payment terms, this is frequently more expensive than a conventional line of credit.

The factoring rate is only part of the total cost. Many factoring agreements also include monthly minimums, due-diligence fees, and early-termination charges. Reading the full fee schedule before signing a factoring agreement is essential.