BLUE COLLAR CFOsBoots before spreadsheetsFactoring, ABL, and what each one really costs you.
Invoice factoring and asset-based lending for trucking, construction, excavation, oil & gas and manufacturing companies. Our team came up on the factoring and ABL side. We know which line in the agreement costs you money, because we used to write it.
Factoring is not the enemy
Used right, factoring is the cheapest working capital an asset-heavy business can get. Used carelessly, it quietly takes a third of your margin. The difference is knowing what you are paying, what you signed, and when it is time to move to a bank line.
Two calculators. Your terms, your days-to-pay.
Factoring cost calculator
Your monthly volume, advance, rate, fee period and the days your customers really take to pay, turned into dollars per month, dollars per year and an effective annual rate.
Run it » CALCULATORFactoring vs ABL calculator
Your factoring terms next to an ABL term sheet: the cash each one gives you, what each one costs a year and the effective annual rate, on the same receivables.
Run it »Four things decide what factoring costs you.
The discount rate and the fee period
The headline rate is charged per fee period, usually 15 or 30 days, not per year. If your customers pay in 45 days on a 30-day period, every invoice is charged twice. What happens the day after a period ends matters as much as the rate.
The advance and the reserve
You get the advance when the invoice is funded. The rest is reserve: your money, held until your customer pays. Your real cost is what you pay divided by the cash you actually received, so a lower advance raises it even when the rate does not move.
The fees outside the rate
Wire and ACH fees, invoice uploads, service charges, credit checks, lockbox fees and shortfalls on a monthly minimum. Individually small. Together, often more than the discount rate.
Recourse or non-recourse
With recourse, you buy back invoices your customer does not pay. Non-recourse costs more and usually covers only a customer going insolvent: not a dispute, not a short-pay, not a customer who simply refuses.
Every component, and which ones a factor will move if you ask: how factoring pricing works »
The rate takes an afternoon. The contract runs for years.
Owners negotiate the rate and sign the rest without reading it. Then, a year and a half later, they want to leave and find out what the agreement actually says. None of these terms is unusual. They are standard, and they are where the money goes.
Read the contract before you read the rate.
- Auto-renewal, and the notice window you have to hit to leave
- A minimum monthly volume you pay for whether you factor it or not
- The early termination formula
- A lien on everything you own, not just your receivables
- How long before an unpaid invoice comes back to you, and how the buy-back is taken
- When the reserve is released, and what the factor can hold it against
- Which of your customers are approved, and up to what limit
- How your customers are notified, and how the factor collects from them
Two different animals.
| Factoring | ABL | |
|---|---|---|
| What it is | You sell your invoices to the factor. | A loan against a borrowing base: a share of your eligible receivables, and sometimes inventory. |
| Who collects | Usually the factor, directly from your customers. | You do. Payments usually land in an account the bank controls. |
| How it is priced | A discount per fee period, plus fees. | An annual interest rate, plus fees. |
| What gets underwritten | Mostly your customers’ credit. | Your statements, your receivables and your business. |
| What you report | Schedules of invoices. | Borrowing base reports, monthly financials, field exams and covenants. |
| Balance sheet | Usually not shown as debt. | Debt. |
For a company that fits the bank, an ABL is usually the better deal. For one that does not, it can be the more expensive mistake. Just about every bank will hand you an ABL application. Getting a line from a bank that fits your company, with covenants you can live with, is the hard part.
How we match the bank to the company » Factoring to ABL, step by step »
Straight answers.
What does factoring really cost?
There is no single number. It depends on your monthly volume, your customers and how fast they pay, your average invoice, recourse or non-recourse, and the fees outside the rate. Add up everything you pay in a month, divide it by the cash you were advanced and annualize it over the days your money was out. The factoring cost calculator does that for you.
Is factoring a loan?
No. You sell your receivables at a discount. The factor takes a first lien on your receivables, approves your customers, and in a recourse facility you buy back invoices that do not pay. It usually does not show up as debt on your balance sheet, which is one reason owners underestimate what it is costing them.
When should I move from factoring to an ABL?
When your books are CPA-prepared and close every month, the business makes money, your customers pay on terms, and you want the freedom of collecting your own receivables and drawing what you need. If your books are not there yet, that is the first project.
Can I get out of my factoring agreement?
That depends on the contract. Look for the initial term, the auto-renewal clause, the notice window, the early termination formula and the minimum volume. When you move to a bank, the bank will want the factor paid off and its lien released at closing, so ask the factor for a payoff letter early.
Which industries do you work with?
Trucking and logistics, construction, excavation, oil & gas services and manufacturing. Asset-heavy, owner-operated companies.
Send us your factoring agreement.
Add your A/R aging. We will tell you what you are really paying, what is in the contract, and whether a bank line is realistic for your company.