Factoring companies charge for their factoring services as a percentage of the full invoice amount. If you factor a $1,000 invoice with an 80% advance rate, the price will be quoted as a percentage of $1,000. For instance a factoring rate of 3% will cost $30.
I’ll also give you a more detailed explanation of why it may be appropriate to price factoring services on the total invoice. Consider that the price of factoring services consists of three components.
- Transaction risk
- Processing or administrative costs
- Financing cost
The factoring company takes on the risk for the entire invoice. Invoice processing and admin costs are the same regardless of the advance rate.
Financing is the only cost that fluctuates with a change in the advance rate. The factoring company’s financing costs is it’s cost of funds to finance the invoice. This cost does vary depending on the advance rate. It costs less to finance 80% of an invoice than it does to finance the entire invoice. However, financing cost is only one of three cost components for providing factoring services.
