BLUE COLLAR CFOsBoots before spreadsheetsWhat your factoring actually costs a year.
Enter the terms from your factoring agreement and the days your customers really take to pay. The calculator turns a rate quoted per period into dollars per month, dollars per year and an effective annual rate. Nothing you enter leaves your browser.
The numbers filled in are examples. Replace them with your own.
What it costs
- Advanced to you each month
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- Held in reserve each month
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- Fee periods charged per invoice
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- Discount charged per month
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- Total cost per month
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- Total cost per year
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- Cost per dollar advanced
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- Effective annual rate
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How to read it
The effective annual rate is the number that matters. A bank line, an ABL and an equipment loan are all quoted as a yearly rate. Factoring is quoted per period. This puts them on the same footing: everything you pay, divided by the cash you actually received, spread over the days your money was out.
Two things make your real number higher than this one:
- A slow reserve. If the factor holds your reserve for weeks after your customer pays, more of your money sits idle than this assumes.
- Invoices that pay late. The days you enter are an average. On most agreements, an invoice that runs into the next fee period is charged for it.
What to do with the number
If it surprises you, you are not the first. The next questions are whether the facility is still the right tool for your company, whether it can be repriced at renewal, and whether your company is ready for a bank line.
Straight answers.
How do you calculate the true cost of factoring?
Add up everything the factor charges on the invoices you factor in a month: the discount for every fee period your customers take to pay, plus the other fees. Divide that by the cash you were advanced, then annualize it over the days your money was out. That effective annual rate is the number you can compare to a bank line.
Why is my factoring cost so much higher than the quoted rate?
Because the quoted rate is per fee period, not per year. A 2% rate charged per 30 days on customers who pay in 45 days is charged twice on every invoice. Then come the fees outside the rate, and the fact that you only receive the advance, not the full invoice.
What counts as other factoring fees?
Wire and ACH fees, invoice or schedule upload fees, monthly service charges, credit check fees, lockbox fees, and any shortfall when you factor less than your monthly minimum. Ask the factor for every fee in writing.
Does the calculator include the reserve?
It shows how much is held back each month. The reserve is your money, released when your customer pays. If your factor releases it late, your real cost is higher than the calculator shows.
Want a second set of eyes on your agreement?
Send us your factoring agreement and your A/R aging. We will tell you what you are really paying and whether a bank line is realistic for your company.