How to use the invoice factoring calculator
- Enter the invoice amount and the advance rate, which is the share of the invoice the factor pays you up front.
- Choose how the factor fee is charged: per 30 days or part of 30 days, prorated by the day, or once per invoice. Enter the fee percent from your agreement.
- Enter the number of days until your customer pays and any other fees on the invoice.
- Read the advance, the reserve held back, the fees, the reserve released and the total you receive, plus the cost as a share of the invoice and as a simple yearly rate.
Formula
Advance = invoice x advance rate
Reserve = invoice - advance
Fee = invoice x fee % x number of periods, plus other fees
Reserve released = reserve - fees
Simple yearly rate = fees / advance x 365 / days
Periods are whole 30 day periods rounded up, the days divided by 30, or one, depending on the fee type you choose.
A $25,000 invoice paid in 45 days
The factor advances 85%, which is $21,250, and holds back a $3,750 reserve. The fee is 2.5% of the invoice for each 30 days or part of 30 days. At 45 days that is 2 periods, so the fee is $25,000 x 2.5% x 2 = $1,250.
When your customer pays, the factor releases the reserve less the fee, $3,750 - $1,250 = $2,500, so in total you receive $23,750. The cost is 5% of the invoice. Compared with the $21,250 advance, $1,250 over 45 days is a simple yearly rate of about 47.7%. With prorated daily fees the fee would be $937.50 instead.
Comparing the cost with other funding
A fee of a few percent sounds small, but it covers a short time. Turning it into a yearly rate makes it comparable with a loan or a line of credit. The simple yearly rate here treats the advance as the amount you borrowed and does not compound.
Factoring can still make sense when the alternative is missing payroll or a supplier deadline. The point of the calculation is to know the price before you agree to it, and to see how much the answer changes when the customer pays later than expected.
Reading the fee terms
Agreements differ in how the fee is charged and on what amount. Some charge on the invoice, some on the advance, and some in tiers by week. Ask for the exact schedule and enter the closest match. Extra charges such as processing or wire fees can go in the other fees field.
To see how late payments affect your cash, pair this with the cash flow forecast calculator and the working capital calculator. The early payment discount calculator covers the opposite situation, where a customer is offered a discount for paying sooner.
Assumptions and limits
- The advance rate and fee are examples. Use the numbers in your agreement.
- Fees are charged on the invoice amount, and the fee comes out of the reserve.
- Application, wire, minimum, late payment and recourse charges are only included if you enter them as other fees.
- The simple yearly rate is not compounded and treats the advance as the borrowed amount.
Frequently asked questions
How much does invoice factoring cost?
It depends on your agreement. Add up the fee for each period the invoice is outstanding plus any other charges, then compare that with the invoice. On a $25,000 invoice, $1,250 in fees is 5%.
What is the difference between the advance and the reserve?
The advance is the part paid to you right away. The reserve is the rest of the invoice, which the factor holds until your customer pays and then releases after deducting its fees.
How do I turn a factoring fee into a yearly rate?
Divide the fees by the advance and multiply by 365 divided by the days the invoice was outstanding. The result is a simple rate and is meant for comparing costs.
What happens if my customer pays late?
With a fee charged per period, a later payment means more periods and a higher fee. Change the days field to see how the cost grows.