Invoice Factoring Costs: Are They Worth It?

“Is invoice factoring worth it?” It’s a question that weighs heavily on the minds of thousands of business leaders every year. The long list of invoice factoring success stories makes it easy to answer with a definitive “yes,” but the reality is that factoring isn’t right for every business or situation. Understanding invoice factoring costs and the value you’ll receive from the services before you commit is essential. In this guide, we’ll walk you through how to do just that and make an informed decision for your company.

Invoice Factoring: A Brief Overview of the Process and Benefits

Two out of three small businesses experience cash flow issues, Intuit surveys show. Nearly one-third say it’s a barrier to covering payroll, paying vendors, managing installments on loans, and addressing other key expenses. It’s unsurprising, then, that more than 80 percent of business failures can be tied to cash flow issues, as Forbes reports.

Invoice factoring helps eliminate these unfortunate scenarios by allowing you to unlock the value of your unpaid B2B invoices on demand—no more waiting weeks or months for your customers to pay.

How Factoring Works

With invoice factoring, you sell your unpaid invoices to a factoring company, also called a factor, at a slight discount in exchange for immediate working capital. Although every factoring company is different, most follow a process like the one outlined below.

• You Deliver Goods or Services: Your business completes work or delivers goods to a customer and issues an invoice. They’ll still be able to pay under your normal terms, whether that’s ten days out or 90.
• You Sell the Invoice to a Factoring Company: Rather than waiting for your client’s payment to roll in, you sell the invoice to a factoring company like Viva Capital. Most businesses receive between 80 and 95 percent of the invoice’s value upfront.
• Your Client Pays the Factor: The factoring company collects payment from your client directly, freeing you from chasing payments.
• You Receive the Remainder: Once your client pays, the factor sends you the rest of the invoice amount, minus a small fee for the service.

Key Terms in Factoring Agreements

To better understand how factoring works in practice, it helps to be familiar with a few common terms.

• Advance Rate: This is the percentage of the invoice amount you receive upfront. It varies by industry and risk profile.
• Reserve: This is the remaining portion of the invoice amount held by the factor until your client pays. After fees are deducted, the reserve is paid out to you.
• Factoring Fee: Also called the discount rate or funding fee, this is the cost of using the factoring service. It’s often quoted as a rate per 30 days, but may accrue daily.

Benefits of Invoice Factoring for Small Businesses

When you’re running a small business, cash flow is your oxygen. By managing cash flow with factoring, you keep that lifeline steady. Because of this, there are many advantages of invoice factoring.

• Improved Cash Flow Stability: Factoring turns outstanding invoices into cash, which helps you stay current on payroll, vendor payments, lease obligations, and other critical expenses.
• Predictable Funding Based on Sales: The more invoices you generate, the more capital you can access. This ties your funding directly to your business activity rather than your credit history or collateral.
• No New Debt: Unlike loans or lines of credit, factoring does not add debt to your balance sheet. You’re selling an asset in exchange for early access to cash.
• Time Savings for Your Team: Factoring companies typically handle collections on your behalf. That means fewer hours spent chasing payments and more time on growth.
• Greater Flexibility: Factoring agreements can be structured around your needs. You can also choose which invoices to factor and when to factor them.

Factoring vs. Traditional Loans

When cash flow gets tight, many business owners immediately think of loans. However, factoring is often better than short-term financing solutions.

• Approval Process: Loans typically require a lengthy approval process with in-depth credit checks, financial statements, and collateral. Factoring is faster and more flexible. Approval is based largely on your client’s ability to pay, not your credit history.
• Funding Speed: Loans can take weeks or months to disburse. Factoring, on the other hand, often gets cash in your hands within two days. At Viva, we offer accelerated service and provide funding within 24 hours.
• Repayment Terms: Loans require scheduled repayments, usually with interest. Factoring does not involve repayment. Your client clears the balance when they pay.
• Balance Sheet Impact: Loans increase your liabilities and affect your debt-to-income ratio. Factoring is not considered debt and does not weigh down your balance sheet, which can make future borrowing easier.
• Scalability: Loans are capped at a predetermined amount. With factoring, your funding potential grows alongside your sales.

Invoice Discounting vs. Factoring

On the surface, invoice discounting and factoring seem similar. Both give your business faster access to the cash tied up in unpaid B2B invoices. However, they work differently behind the scenes.

• Customer Communication: With factoring, your clients usually pay the factoring company directly. They may also be notified that your invoices are being handled by a third party. In discounting, you retain control of the collections process, and your customers are often unaware that you are working with a financing partner.
• Collections and Administration: Factoring often includes credit checks on your clients, collections, and accounts receivable management. Invoice discounting leaves that entirely in your hands.
• Qualification Requirements: Invoice discounting typically requires a stronger credit profile and financial track record. Factoring is often more accessible to newer businesses or those with less established credit, since the risk assessment is based on your clients’ creditworthiness.

How Invoice Factoring Fees Work

As we covered earlier, when you factor an invoice, you receive a percentage of its value up front, and the factoring company keeps a small portion as a fee for the service. There are a few different methods of calculating factoring costs.

• Flat Fee: Some factoring companies charge a single fixed percentage for the full duration of the invoice. For example, you might pay a two percent fee for a 30-day invoice.
• Tiered or Time-Based Fee: Others use a tiered structure where fees increase over time. You might pay two percent for the first 30 days, plus an additional one percent every ten days thereafter. This approach rewards faster payments.

This is also where potential “hidden costs of invoice factoring” might come in. Whereas some factoring companies include all services, such as credit checks, collections, and disbursement, in their rate, others may charge individually for these services. It’s important to clarify what other costs you might experience and look at the full picture when comparing invoice factoring rates.

Considerations That Influence Costs

Factoring rates vary based on several considerations.

• Client Creditworthiness: If your clients have strong payment histories, you’re likely to receive lower rates. Riskier clients usually result in higher rates.
• Industry Risk Profile: Some industries carry more risk, which can increase fees.
• Invoice Volume and Size: Larger invoice amounts or higher monthly volumes often qualify for lower rates.
• Payment Terms: Longer payment terms mean more time before the factor is repaid, which can increase costs.
• Recourse vs. Non-Recourse: With recourse factoring, you take responsibility if your client fails to pay. Non-recourse factoring shifts that risk to the factoring company, but typically costs more.

Typical Range for Factoring Fees

Most small businesses pay between one and five percent of the invoice value in factoring fees. However, this varies widely based on the factors listed above. Knowing where your business falls on the risk and volume scale can help you estimate costs more accurately.

Get a Quick Estimate with Our Invoice Factoring Calculator

Our instant invoice factoring calculator uses basic information, including your total invoice amount and average payment term, to provide an estimated funding fee. Check it out now, or talk to a funding specialist for a free personalized quote.

How to Keep the Cost of Invoice Factoring Low

Businesses have more control over the cost of factoring than they often realize. Follow the tips below to minimize the financial impact of factoring.

• Choose the Right Type of Factoring: Recourse factoring is generally less expensive than non-recourse because you agree to cover unpaid invoices if your client defaults. If your clients have strong payment histories, this option can help reduce your rate.
• Factor High-Quality Invoices: Invoices issued to established, creditworthy businesses often qualify for lower fees. Prioritize factoring invoices for clients who pay on time and have solid reputations.
• Keep Payment Terms Short: Shorter payment cycles reduce the risk for the factoring company, which may translate to better rates. If you can offer net 30 terms instead of net 60, you may save on fees.
• Maintain Consistent Volume: Many factoring companies offer tiered pricing based on monthly volume. You may qualify for volume-based discounts if you factor regularly or in larger batches.
• Limit the Use of Add-On Services: Some factoring companies charge extra for credit checks, same-day funding, or other services. Ask for a breakdown of these costs and opt out when they are not essential and are unlikely to benefit you financially in the long run.
• Negotiate Factoring Fees: There is sometimes room for negotiating factoring fees. Go into it knowing what matters most to your business and find out if there are different ways to structure your agreement that might reduce your overall costs.
• Review Your Agreement Carefully: Understand what triggers extra charges. For instance, some factors impose additional fees if your client is late or if you’ve agreed to minimums but don’t meet them. Knowing what to expect will allow you to avoid surprises.

How to Tell if Factoring Costs Are Worth it for Your Business

Factoring can’t solve all your problems, but it’s the difference between stalled growth and forward momentum for many businesses. The key is knowing whether the value you gain from factoring outweighs the cost. Below, we’ll outline some scenarios where this is typically true.

• You’re Losing Time Chasing Invoices: If your team is spending hours each week following up on late payments, factoring can help. Factoring delivers measurable time savings between the outsourced collections, credit checks, and account management.
• You Need Faster Cash Flow to Stay on Track: Factoring helps close gaps when cash gets tight between billing and payment. If delayed payments are holding you back from meeting payroll, stocking inventory, or accepting big contracts, the cost of factoring may be minor compared to the opportunities you gain.
• You’re Tired of Taking on Debt: Unlike loans, factoring gives you access to working capital without adding liabilities to your balance sheet. If you’re looking for short-term financing solutions that do not increase your debt load, factoring can fill the gap without adding debt.
• You’re Scaling Quickly: Rapid growth often creates a cash crunch. Factoring helps you meet rising demand without slowing down or stretching your budget. If you’re landing bigger clients or more frequent orders, having predictable access to cash can be transformative.
• You Want to Keep Vendor Relationships Strong: Reliable cash flow helps you pay vendors on time, qualify for early payment discounts, and maintain solid credit with suppliers. Factoring enables you to strengthen these relationships by keeping your business financially consistent.

Find Out Your Personalized Invoice Factoring Costs

As one of the best factoring companies for SMEs and with decades in the industry, we’ve helped countless businesses thrive and scale. If you believe factoring can bring value to your business but aren’t sure if it’s worth it due to costs, we’re happy to put together a personalized rate quote at no cost to you. Share a few details about your business to get started.