Factoring companies make money mainly by buying your unpaid invoices at a discount and collecting the full face value from your customers. The core charge is the discount rate, usually 1% to 5% of each invoice for every 30 days it stays unpaid. On top of that, factors earn from tiered pricing on aging invoices, setup and processing fees, risk premiums on non-recourse deals, minimum volume shortfalls, and early termination penalties written into the contract.
The Discount Rate Does Most of the Work
When you hand an invoice to a factor, two things happen. The factor advances you a percentage of the face value up front, typically 70% to 90%. The rest goes into a reserve account until your customer pays.
Once the customer pays in full, the factor releases the reserve back to you, minus the discount fee. On a $10,000 invoice with an 85% advance and a 3% discount rate, you get $8,500 immediately. When the customer pays 30 days later, the factor keeps $300 and sends you the remaining $1,200. That $300 is the factor’s revenue on the transaction.
Tiered Aging Pricing
Most factoring agreements raise the fee the longer an invoice sits unpaid. A contract might charge 2.75% for the first 30 days, 3.75% from day 31 to day 45, and more if the invoice ages past 60 days. This is where factors quietly earn more than the headline number implies. They benefit financially when your customers pay slowly, which is an incentive misalignment worth understanding before you sign.
Why a Small Percentage Adds Up
A 3% factoring fee sounds modest until you annualize it. If your customers consistently pay in 30 days and you’re paying 3% each cycle, you’re paying roughly 36% per year for that capital. Stretch payment to 60 days at a tiered 5%, and you’re still over 30% annualized. Those numbers would draw attention on a credit card statement, but they’re standard in factoring.
Factoring companies aren’t required by federal law to show you an annualized rate. The Consumer Financial Protection Bureau excludes factoring from its definition of covered credit transactions, so the disclosure rules that apply to traditional lenders don’t apply here.1Federal Register. Small Business Lending Under the Equal Credit Opportunity Act Regulation B Some states now require commercial financing disclosures that include total cost of capital, but most don’t. You need to run the annualized math yourself before comparing factoring to a line of credit.
Ancillary Fees That Stack Up
The discount rate gets the attention, but factors earn meaningful revenue from a menu of smaller charges.
- Application and setup fees, typically $200 to $500, cover the factor’s initial underwriting.
- Credit check fees, $10 to $50 each, apply every time the factor evaluates one of your customers.
- Wire transfer fees run $15 to $35 per same-day transfer. ACH is usually cheaper or free.
- Monthly minimum volume fees kick in when you factor less than the contract requires; you pay a shortfall to make up the gap.
- Invoice processing and lockbox fees cover per-invoice handling or the address where customers send payments.
The charges that catch people off guard are buried in the fee schedule. Re-aging penalties trigger when an invoice passes a certain age. Misdirected payment fees apply when a customer accidentally pays you instead of the factor. Technology platform fees cover portal access. None are large on their own. A business factoring $50,000 a month can still pay $500 to $1,000 in ancillary fees on top of the discount rate.
How Volume and Customer Credit Move the Price
Two variables drive most of the negotiation: how much you factor and how creditworthy your customers are.
Higher volume gives you leverage. A business factoring $500,000 monthly might negotiate a rate of 1% to 1.5%. A business factoring $20,000 might pay 3% to 5%. The factor’s overhead doesn’t scale linearly with account size, so larger clients are more profitable per dollar of internal cost, and some of that efficiency shows up as a lower rate.
Your customers’ credit profiles matter more than your own. Factors are buying the right to collect from those customers, so what they care about is whether those customers pay. Invoices owed by Fortune 500 companies or government agencies carry minimal collection risk and get competitive rates. Invoices owed by smaller companies with spotty payment histories get priced higher, often with a larger reserve holdback.
Recourse vs. Non-Recourse Pricing
The recourse structure is the biggest pricing lever in a factoring agreement, and it’s widely misunderstood.
In a recourse agreement, you stay on the hook if your customer doesn’t pay. The factor can charge the unpaid invoice back to you or deduct it from your reserve. Because you absorb the credit risk, the discount rate is lower. Most U.S. factoring is recourse-based.
Non-recourse factoring moves the credit risk to the factor, but only for one specific scenario: your customer’s insolvency or bankruptcy. Non-recourse rates typically run 0.5% to 2% higher than comparable recourse deals because the factor is self-insuring against that loss.
The Carve-Outs That Make Non-Recourse Profitable
Non-recourse doesn’t mean risk-free. If your customer refuses to pay because of a dispute over quality of work, a delivery problem, or missing documentation, most non-recourse agreements treat that as a recourse event. The factor charges the invoice back to you or holds your reserve until you resolve the dispute. The same applies to fraud, duplicate invoices, rate disagreements, and invoices to customers not on the factor’s approved list.
In practice, non-recourse protection only activates when a customer genuinely can’t pay because of financial failure. Slow payment, partial payment, and disputed invoices all fall outside coverage. The higher fee mostly buys protection against a narrow risk, and the factor collects the premium on every invoice whether the risk materializes or not. Across hundreds of invoices, that premium works as a profitable internal insurance pool.
Contract Lock-Ins and Termination Fees
Factoring agreements usually lock you in for an initial term of one to three years, with automatic annual renewals unless you give written notice, typically 60 to 90 days before the renewal date. Miss the window and you’re committed for another year.
Leave before the term expires and you’ll face an early termination fee, generally 3% to 15% of your credit line. On a $200,000 facility, that’s $6,000 to $30,000 to walk away. The fee is usually calculated against the full credit line rather than your outstanding balance, so scaling down your factoring activity doesn’t shrink the penalty.
Termination fees are a real revenue source because they create switching costs that keep clients in place even after the relationship stops making sense. The time to negotiate these terms is before you sign. Some factors offer month-to-month deals with no termination penalty, but they charge higher discount rates in exchange. You can also exit at the end of any term without penalty as long as purchased invoices have been collected and fees are settled, but the notice window is strict.
Why Factoring Fees Aren’t Capped
Factoring occupies a legal position that directly shapes how much factors can charge. Because factoring is structured as a purchase of accounts receivable rather than a loan, it falls outside the lending regulations that cap interest rates in most states. That’s the fundamental reason factoring fees can annualize to 30%, 40%, or more without running into usury laws.
Article 9 of the Uniform Commercial Code governs the framework. Section 9-109 explicitly includes a sale of accounts within its scope, so factoring transactions follow Article 9’s rules for perfecting a security interest even though they’re technically sales.2Legal Information Institute. UCC 9-109 Scope The factor files a UCC-1 financing statement to publicly establish ownership of the purchased invoices, which puts other creditors on notice that those receivables belong to the factor.3Legal Information Institute. UCC Article 9 Secured Transactions
No federal agency regulates factoring fees the way the CFPB oversees consumer lending.1Federal Register. Small Business Lending Under the Equal Credit Opportunity Act Regulation B A growing number of states have passed commercial financing disclosure laws requiring factors to show the total dollar cost and annualized rate before you sign, but coverage is far from universal. Until that changes, calculating the true cost of factoring capital before committing is on you.