Factoring Your Receivables is an excellent way to increase your cash flow, but how much does it really cost? Typically, if you have net 30 terms with your client you will pay between 2-5 percent. Most factoring companies charge 1% of the total invoice every 7-10 days.
For example, if your invoice is $1,000 and goes out 38 days on a fee schedule of 1% every 10 days you will pay 4% or $40 on that invoice. That really isn’t very expensive when you consider that you will have 85% or $850 of that invoice the next day after sending it to your customer.
Another way to look at it is offering a discount for early payment. Have you ever offered your customer a 5% discount for paying in net 15? Factoring is like taking a discount to get paid quicker. It makes sense if you need a stronger cash flow and have adequate margins for profit.