The Main Parts of a Factoring Transaction
An advertised percentage does not necessarily describe the complete cost of a factoring relationship. To understand the economics, a business should separate the invoice face value, initial advance, reserve, factoring fee, and any additional charges.
Invoice Face Value
The invoice face value is the amount billed to the customer. Credits, returns, offsets, disputes, and other adjustments can reduce the amount ultimately collected, so the original invoice amount and final collectible amount may differ.
Initial Advance
The initial advance is the portion of an approved invoice purchase price made available after the provider completes its approval and verification process. The advance rate affects when the business receives cash; it is not itself the factoring fee.
Reserve
The reserve is the portion not included in the initial advance. After customer payment, the provider settles the transaction and may deduct applicable fees, credits, chargebacks, or other amounts permitted by the agreement before releasing any remaining reserve.
Factoring Fee
The factoring fee is a stated cost of the transaction. A business should confirm the amount against which the percentage is applied, the period it covers, when additional increments begin, and whether other charges apply.
How Factoring Fees May Be Structured
Flat Fees
A flat-fee structure states one fee for a defined transaction or period. The agreement should still explain what happens if payment arrives outside that period and whether any other charges apply.
Periodic or Time-Based Fees
A periodic structure starts with an initial fee period and adds charges as the invoice remains unpaid. The agreement should state whether each increment is charged in full or prorated and which date starts the calculation.
Tiered, Monthly, and Index-Linked Pricing
Other arrangements may change at stated timing tiers, include monthly minimums or account-level charges, or use a referenced index plus a margin. These structures require their own calculations; no single method should be assumed to apply to every provider.
The educational model on this page demonstrates one time-based calculation. It is not universal industry pricing, LIEquity pricing, a provider quote, or guaranteed terms.
Educational Advance and Reserve Examples
Assume one eligible $100,000 invoice. The examples below isolate advance and reserve mechanics; no fee is included in this table.
| Educational advance assumption | Initial advance | Initial reserve |
|---|---|---|
| 80% | $80,000 | $20,000 |
| 85% | $85,000 | $15,000 |
| 90% | $90,000 | $10,000 |
A larger advance changes the timing of available cash. It does not change the fee calculation under the educational model used below.
Educational Payment-Timing Example
For this educational model, 2.75% covers days 1 through 30. Beginning on day 31, each additional 10-day period or portion of a period adds 1.00%. The model ends at day 90.
| Customer payment timing | Educational fee rate | Fee on $100,000 |
|---|---|---|
| Days 1–30 | 2.75% | $2,750 |
| Days 31–40 | 3.75% | $3,750 |
| Days 41–50 | 4.75% | $4,750 |
| Days 51–60 | 5.75% | $5,750 |
| Days 61–70 | 6.75% | $6,750 |
| Days 71–80 | 7.75% | $7,750 |
| Days 81–90 | 8.75% | $8,750 |
How Partial Periods Work
A partial additional period triggers the next increment in this model. Day 31 therefore uses 3.75%, and day 41 uses 4.75%. For a payment day between 31 and 90, the number of additional periods is the result of rounding up (payment days minus 30) divided by 10.
This educational schedule stops at day 90 and a maximum modeled fee of 8.75%. It does not invent a fee or remedy after day 90; the applicable factoring agreement determines what happens beyond the modeled period.
An 85% Advance and Reserve Illustration
The following illustration combines an 85% advance assumption with the educational timing model. It assumes a $100,000 eligible invoice, an $85,000 initial advance, a $15,000 initial reserve, and no additional charges, credits, disputes, offsets, dilution, chargebacks, or other adjustments.
| Payment timing | Initial advance | Educational fee | Illustrative reserve release | Total proceeds |
|---|---|---|---|---|
| 30 days | $85,000 | $2,750 | $12,250 | $97,250 |
| 40 days | $85,000 | $3,750 | $11,250 | $96,250 |
| 50 days | $85,000 | $4,750 | $10,250 | $95,250 |
| 60 days | $85,000 | $5,750 | $9,250 | $94,250 |
| 70 days | $85,000 | $6,750 | $8,250 | $93,250 |
| 80 days | $85,000 | $7,750 | $7,250 | $92,250 |
| 90 days | $85,000 | $8,750 | $6,250 | $91,250 |
The illustrative reserve release equals the $15,000 initial reserve minus the educational factoring fee. Total proceeds equal the $85,000 initial advance plus that reserve release. Actual settlement follows the provider's agreement and may include other permitted adjustments.
Additional Fees and Contract Costs to Review
A complete comparison should identify every charge that may apply, even when it does not appear in the headline fee.
- Application, setup, origination, due-diligence, background, or credit-review charges.
- Invoice-processing, verification, ACH, wire, lockbox, and expedited-funding charges.
- Monthly minimum, minimum-volume, unused-facility, maintenance, or account-management charges.
- Renewal, early-termination, lien-release, legal, filing, or documentation charges.
- Chargebacks, repurchase obligations, credits, offsets, and other reserve adjustments permitted by the agreement.
How to Compare the Total Cost of Two Proposals
Use the same assumptions for each proposal
- Use the same eligible invoice amount and customer payment dates.
- Apply each proposal's exact fee formula and partial-period rules.
- Convert each applicable fee and charge to dollars.
- Include per-invoice, per-funding, monthly, renewal, and termination charges where relevant.
- Separate the initial advance from the total transaction cost.
- Calculate the expected reserve release and total proceeds.
- Compare more than one realistic customer payment date.
- Review eligibility, recourse, minimum-volume, and contract obligations alongside price.
Annualized figures can provide additional context, but they should be explained carefully because annualizing a short-duration receivables transaction can overstate or obscure the practical comparison.
Questions to Ask About Factoring Costs
Clarify the complete pricing method
- Is the fee calculated from invoice face value, the amount advanced, or another amount?
- Which date starts the initial fee period?
- Are additional periods charged in full or prorated?
- Which setup, due-diligence, invoice, funding, transfer, or account charges may apply?
- Do minimum-volume, monthly-minimum, or unused-facility requirements apply?
- Which credits, offsets, chargebacks, or other adjustments may reduce the reserve release?
- What renewal, notice, and early-termination provisions apply?
- Can the provider show the expected dollar cost at realistic customer payment dates?
Review the Complete Agreement
A proposal summary or headline percentage may omit conditions that affect the total cost. Review the complete agreement, attached schedules, customer limits, minimums, renewal terms, termination provisions, and permitted reserve deductions before deciding whether the arrangement makes economic sense.
Frequently Asked Questions
Is the advance rate the cost of factoring?
No. The advance rate determines the portion included in the initial advance. The factoring fee and other applicable charges determine cost.
How does the educational fee change after day 30?
The approved educational model adds 1.00% of invoice face value for each additional 10-day period or portion after day 30, through day 90.
What happens if payment arrives partway through an additional period?
Under the educational model, a partial additional period triggers the next fee tier. For example, day 31 uses 3.75% and day 41 uses 4.75%. Actual agreements may calculate timing differently.
Is the 2.75% assumption LIEquity or standard industry pricing?
No. It is an educational assumption used to demonstrate a time-based calculation. It is not LIEquity pricing, standard industry pricing, or a provider quote.
Are there costs beyond the stated factoring fee?
There may be. A proposal may include setup, due-diligence, processing, transfer, minimum-volume, renewal, termination, or other applicable charges.
What happens to the reserve?
The remaining reserve may be released after customer payment and settlement, less applicable fees, adjustments, deductions, or chargebacks permitted by the agreement.
What happens if the invoice remains unpaid after day 90?
The educational model stops at day 90 and does not calculate additional fees or remedies. Treatment after that point depends on the applicable factoring agreement.
These calculations use assumptions selected for this LIEquity educational resource. They are not universal industry pricing, an offer, a provider quote, a guaranteed rate, or a promise of approval. LIEquity is an independent commercial factoring broker and does not directly provide funding. Actual terms depend on the provider and agreement.