How invoice factoring works
Invoice factoring (also called accounts receivable financing) lets you sell an unpaid invoice to a third-party lender — the factor — in exchange for immediate cash. The factor collects payment directly from your customer when the invoice comes due.
The transaction has three parts:
- Advance: The factor pays you a percentage of the invoice face value upfront — typically 70–95%. This is the cash you receive on day one.
- Reserve: The remaining percentage (100% − advance rate) is held until your customer pays.
- Fee: When the invoice is collected, the factor deducts its fee — a flat percentage of the invoice face value — from the reserve. You receive whatever is left.
Effective APR annualizes the cost so you can compare factoring to other financing. The formula is:
Effective APR = (fee ÷ advance) × (365 ÷ collection days)
Because the fee is fixed but the advance varies with the advance rate, a lower advance rate produces a higher APR even with the same flat fee — you are paying the same cost for fewer dollars received.
Factor fee vs. discount rate
Some factors quote a flat fee (e.g., 3% of the invoice), while others quote adiscount rate per period (e.g., 1% per 30 days). This calculator uses the flat-fee model, which is most common for spot (one-off) factoring. If your factor quotes a periodic rate, multiply it by the number of periods to get the equivalent flat fee.
Worked examples
Example 1 — staffing agency, net-30 invoice: A staffing company has a $50,000 invoice due in 30 days. The factor advances 90% at a 2% flat fee.
| Item | Amount |
|---|---|
| Invoice face value | $50,000 |
| Advance (90%) | $45,000 — received on day 1 |
| Reserve held (10%) | $5,000 |
| Factor fee (2% of $50,000) | $1,000 |
| Reserve returned | $4,000 — received when customer pays |
| Total received | $49,000 |
| Effective APR | ($1,000 ÷ $45,000) × (365 ÷ 30) ≈ 27.1% |
Example 2 — construction subcontractor, net-60 invoice: A subcontractor factors a $120,000 invoice with a 60-day payment term. The factor offers an 85% advance at a 3% flat fee.
| Item | Amount |
|---|---|
| Invoice face value | $120,000 |
| Advance (85%) | $102,000 — received on day 1 |
| Reserve held (15%) | $18,000 |
| Factor fee (3% of $120,000) | $3,600 |
| Reserve returned | $14,400 — received when customer pays |
| Total received | $116,400 |
| Effective APR | ($3,600 ÷ $102,000) × (365 ÷ 60) ≈ 21.5% |
The longer payment term (60 vs. 30 days) results in a lower annualized APR even though the flat fee percentage is higher — because the same cost is spread over twice as many days.
Assumptions and limitations
- This calculator models spot factoring with a flat fee. Recourse vs. non-recourse terms, monthly minimums, origination fees, and wire/ACH fees are not included. Always read the full factor agreement, including what happens if your customer doesn't pay.
- The effective APR assumes the advance is outstanding for exactly the number of collection days entered. If your customer pays early or late, the actual annualized cost will differ.
- The advance calculation does not account for concentration limits (some factors cap the percentage of your receivables from a single customer) ordilution reserves (withheld for disputed invoices or returns).
- If the factor fee exceeds the reserve (fee % > 100% − advance rate), the reserve returned will be negative, meaning you owe the factor the shortfall. This calculator shows that scenario; always verify with your factor whether such arrangements are recourse or non-recourse.
Frequently asked questions
- What is a typical advance rate and factor fee?
- Advance rates typically range from 70% to 95% depending on the industry, the creditworthiness of your customers, and the factor. Factor fees typically range from 1% to 5% of the invoice for a 30-day invoice; longer-term invoices or riskier customers carry higher fees. Staffing, trucking, and healthcare receivables often see the most competitive rates because the invoice quality is well understood.
- What's the difference between recourse and non-recourse factoring?
- With recourse factoring, you remain liable if your customer doesn't pay — the factor can demand you buy back the invoice. With non-recourse factoring, the factor absorbs the credit risk if your customer becomes insolvent, but fees are higher. Non-recourse does not protect you from disputes, returns, or slow-pay situations; read the contract carefully. Most small-business factoring is recourse.
- How does factoring compare to a business line of credit?
- A line of credit gives you a revolving borrowing limit and charges interest only on what you draw; its APR is typically 8–24% for established businesses. Factoring's effective APR is usually higher (20–60%), but it does not require the same credit profile — the factor's underwriting focuses on your customers' creditworthiness, not yours. Factoring is easier to access for new businesses or those with thin credit history.
- Can I factor any invoice?
- Most factors require B2B invoices payable by creditworthy business customers — not consumer receivables, progress-billed contracts, or invoices that are already collateralized under a bank line. The invoice must represent completed, uncontested work or delivery. Many factors also require a minimum monthly volume ($10,000–$50,000) and will not factor invoices from customers with poor payment histories. Owner-operators and small trucking companies have their own niche of freight-specific factors; see the freight factoring calculator on Trucker Numbers for trucking-specific rates and terms.
- Is the factor fee tax-deductible?
- Yes. Factor fees are a financing cost and are generally deductible as a business expense, similar to loan interest. Consult your CPA for your specific situation; this calculator does not compute after-tax costs.
Sources
- Secured Finance Network — Annual Asset-Based Lending and Factoring Survey (advance rates, fee ranges, typical terms) (accessed 2026-10-04)
- Federal Reserve Banks — 2024 Small Business Credit Survey: Report on Employer Firms (alternative financing usage) (accessed 2026-10-04)
- Small Business Administration — "Get Business Loan Financing" (accessed 2026-10-04)