How does invoice factoring work and what does it cost?

Invoice factoring lets you sell unpaid invoices to a factoring company for immediate cash. The factor advances 80–95% of the invoice value upfront, then collects from your customer. When paid, they remit the remaining balance minus a factoring fee (typically 1–5% of invoice value depending on terms and creditworthiness). The cost seems low per invoice but can equate to 20–60% APR annualized — making it expensive compared to a line of credit if used heavily.

What is a typical invoice factoring rate?

Factoring fees typically range from 1–5% of the invoice face value, depending on invoice size, customer creditworthiness, payment terms (Net 30 vs Net 90), and your industry. Some factors charge a flat fee per invoice regardless of time; others charge a weekly or monthly rate that compounds if the customer pays late. Always calculate the annualized APR equivalent — not just the flat fee — to compare factoring to other financing options.

Is invoice factoring worth it for small businesses?

Invoice factoring makes sense when: (1) you have long payment cycles (Net 60–90) and cash flow gaps are hurting operations, (2) you can't qualify for a business line of credit, or (3) the cost of factoring is less than the cost of turning down new work due to cash constraints. It's typically not worth it if you have access to a line of credit at under 15% APR, since factoring fees often equate to 25–60% APR annualized.

SmartBizCalc

Invoice Factoring Calculator

See your true factoring cost — advance, fees, net cash, and annualized APR — so you can compare invoice factoring to other financing options before you commit.

Invoice Details

Invoice Face Value ($)

Advance Rate (%)

Factoring Fee (%)

Payment Terms

Days Until Customer Pays

Additional Fees ($)

Compare: What if you waited?

Your Monthly Revenue (for opportunity cost)

Factoring Cost Breakdown

Invoice Face Value—

Upfront Advance—

Factoring Fee (total)—

Additional Fees—

Reserve Released at Payment—

Net Cash Received (total)—

True Cost

Cost as % of Invoice—

Annualized APR Equivalent—

Cost vs Waiting (opportunity)—

APR equivalent is calculated as: (total fees ÷ advance received) × (365 ÷ days to payment). Compare this to business line of credit rates (8–20% APR) when evaluating factoring. Rates and terms vary significantly by factor and invoice quality.

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