Invoice Factoring Calculator

How the invoice factoring calculator works

Invoice factoring turns an unpaid invoice into cash before your customer pays it. A factoring company buys the receivable, sends you most of its value immediately, and then collects from your customer directly. This calculator models the three amounts that transaction produces: the advance you receive today, the fee the factor keeps, and the rebate that comes back to you once the invoice settles.

Two details cause most of the confusion in factoring quotes. First, the fee is charged against the full face value of the invoice, not against the smaller amount of cash you actually receive. Second, the advance rate and the fee are separate terms in the arithmetic: the fee is computed from face value, so changing the advance rate alone does not change the fee. In a real quote the two are usually negotiated together, and a higher advance rate is often paired with a higher fee, since more of the factor's capital is outstanding. This calculator holds them independent so you can see each effect on its own.

How a factoring fee converts to an effective APR

A factoring fee quoted as "3%" reads a lot like a bank rate quoted as "3%", but the two describe completely different periods. The bank rate is annual. The factoring fee covers however long the invoice takes to clear, which is often 30 to 90 days. Converting the fee to an effective APR puts both numbers on the same footing.

The conversion does two things. It divides the fee by the advance rather than by the invoice, because the advance is the money you actually had the use of. Then it scales that cost up to a full year by multiplying by 365 divided by the number of days the cash was outstanding.

The comparison table above shows why timing dominates the result. Under a flat fee, the fee stays the same no matter how slowly your customer pays, so the effective APR falls as the days stretch out — the same dollar cost is simply spread over more time. Under a per-30-day fee, the fee is fixed inside a period while the days keep accruing, so the APR falls as the invoice ages; each time the invoice crosses another 30 day boundary the fee steps up and the APR jumps back up. The result is a sawtooth rather than a smooth decline. An invoice paid on day 31 is charged exactly as much as one paid on day 60 — two periods either way — but the day 31 APR is roughly twice as high, because the same dollar cost is spread over half the time.

Recourse and non-recourse factoring

Recourse factoring means you keep the credit risk. If your customer never pays, the factor charges the invoice back to you, either as a direct repayment or as an offset against your next advance. Most factoring agreements are recourse agreements, and their fees are lower because the factor's exposure is limited.

Non-recourse factoring shifts that risk to the factor, but the shift is usually narrower than the name suggests. Non-recourse protection typically applies only when the customer cannot pay because of insolvency or bankruptcy. It generally does not apply when the customer refuses to pay because of a dispute over the work, a short shipment, or a billing error — and those disputes are a common reason invoices go unpaid. The definition of the covered event in the agreement, not the label, determines what the higher fee actually buys.

How factoring differs from a loan

A loan creates debt: you receive principal, you owe interest, and you repay on a schedule. Factoring is a sale. You transfer ownership of a receivable to the factor at a discount, and that discount is the factor's compensation. There is no principal balance, no amortization schedule, and no maturity date. The transaction ends when your customer pays.

That distinction carries practical consequences. Because the factor collects from your customer, the factor underwrites your customer's credit more heavily than yours, which is why factoring is available to companies that would not qualify for a term loan. It also means your customer usually learns about the arrangement, since payment is redirected to the factor. Whether the arrangement appears on your balance sheet depends on how the transfer is accounted for rather than on the label it carries. A transfer that qualifies as a true sale removes the receivable; a recourse arrangement often does not qualify and is recorded as a secured borrowing, which leaves both the receivable and a corresponding liability on the books. The treatment can matter where loan covenants restrict additional borrowing, and an accountant can determine which one applies to a specific agreement.

The differences run the other way as well. A loan has a stated rate you can compare directly against other loans, while factoring has a fee whose annualized cost depends on collection speed you do not control. Factoring also converts only revenue you have already earned, so the amount available is capped by your outstanding receivables rather than by your borrowing capacity.

What changes the cost

• Advance rate — a higher advance rate lowers the effective APR, because the same fee is spread across more cash in hand.
• Fee percentage and structure — whether the fee is charged once or per 30 day period matters as much as the number itself.
• Collection speed — under a periodic fee, a customer who pays on day 31 costs you the same as one who pays on day 60.
• Reserve timing — the rebate only arrives after settlement, so it is not cash you can plan around on day one.
• Contract terms — monthly minimums, volume commitments, and termination clauses sit outside the per-invoice math shown here.

To compare a factoring quote against other financing, put the effective APR here next to the APR of the alternative. To see how the advance and the rebate land in your operating account, model them in the cash flow calculator.