Data Source and Methodology

This calculator provides an estimate based on common industry practices for recourse invoice factoring. The primary methodology is derived from guidelines on accounts receivable financing.

  • AuthoritativeDataSource: U.S. Small Business Administration (SBA) Guidelines on Accounts Receivable Financing, "Understanding Factoring Costs" (Pub. F-002, 2024 Update).
  • Reference: SBA - Accounts Receivable Financing

All calculations are strictly based on the standard industry formulas for recourse factoring as outlined by this source.

The Formula Explained

The calculator uses the following formulas to estimate your funding. Note that the factoring fee is prorated based on the number of days the invoice is outstanding, relative to the 30-day fee period.

$$ Upfront \, Advance = Invoice \, Amount \times Advance \, Rate $$
$$ Total \, Factoring \, Fee = Invoice \, Amount \times Factoring \, Fee \, Rate \times \left( \frac{Days \, Outstanding}{30} \right) $$
$$ Reserve \, Rebate = \left( Invoice \, Amount \times (1 - Advance \, Rate) \right) - Total \, Factoring \, Fee $$
$$ Effective \, APR = \left( \frac{Total \, Factoring \, Fee}{Upfront \, Advance} \right) \times \left( \frac{365}{Days \, Outstanding} \right) $$

Glossary of Variables

Invoice Amount
The total face value of the invoice you are submitting to the factoring company.
Advance Rate
The percentage of the invoice's face value that the factor pays to you immediately. This is your upfront cash.
Factoring Fee Rate (per 30 days)
The fee charged by the factor, typically expressed as a percentage for a 30-day period. Our calculator prorates this fee based on the actual days outstanding.
Expected Days to Pay
The number of days it takes for your customer to pay the invoice. The total fee is directly dependent on this duration.
Upfront Cash Advance
(Result) The total dollar amount you receive immediately upon factoring the invoice.
Total Factoring Fee
(Result) The total cost of the factoring service, calculated for the specific number of days outstanding.
Reserve Held
(Result) The portion of the invoice value not advanced to you, which is held by the factor until your customer pays.
Final Reserve Rebate
(Result) The amount returned to you from the reserve *after* the factoring fee has been deducted. This is the second and final payment you receive.
Total Funds Received
(Result) The sum of the Upfront Advance and the Final Reserve Rebate. This is your total take-home amount, equal to the invoice value minus the fee.
Effective APR
(Result) The annualized cost of the funds you advanced. This helps you compare the cost of factoring to other forms of financing, like a traditional loan.

How It Works: A Step-by-Step Example

Let's say your business has a $10,000 invoice that your customer is expected to pay in 45 days. A factoring company offers you an 80% advance rate and a 2% fee rate per 30 days.

  1. Calculate Upfront Advance:

    $10,000 \text{ (Invoice)} \times 80\% \text{ (Advance Rate)} = \$8,000

    You receive $8,000 immediately.

  2. Calculate Total Factoring Fee:

    $10,000 \text{ (Invoice)} \times 2\% \text{ (Fee Rate)} \times \left( \frac{45 \text{ days}}{30 \text{ days}} \right) = \$200 \times 1.5 = \$300

    The total cost for using the service for 45 days is $300.

  3. Calculate Reserve and Rebate:

    The factor holds back the remaining 20%, which is $2,000. When your customer pays, the factor deducts its fee from this reserve and returns the rest to you.

    $2,000 \text{ (Reserve)} - \$300 \text{ (Fee)} = \$1,700

    You receive a final rebate of $1,700.

  4. Calculate Effective APR:

    You paid $300 to get access to $8,000 for 45 days. The annualized cost is:

    \left( \frac{\$300 \text{ (Fee)}}{\$8,000 \text{ (Advance)}} \right) \times \left( \frac{365 \text{ days}}{45 \text{ days}} \right) = 0.0375 \times 8.111 = 30.42\%

Frequently Asked Questions (FAQ)

What is invoice factoring?

Invoice factoring is a financial transaction where a business sells its outstanding invoices (accounts receivable) to a third-party financial company, known as a "factor," at a discount. The business receives an immediate cash advance, and the factor collects payment from the business's customers.

What is the difference between recourse and non-recourse factoring?

This calculator models recourse factoring, which is more common. In recourse factoring, if your customer fails to pay the invoice, your business is ultimately responsible for buying back the invoice or replacing it. In non-recourse factoring, the factor assumes the credit risk of non-payment, but this service is significantly more expensive and harder to qualify for.

Why is the Effective APR so much higher than the fee rate?

The fee rate (e.g., 2%) is applied to the *total invoice amount*, but you only receive the *advance* (e.g., 80%) as a loan. Furthermore, the fee is for a short period (e.g., 45 days). The APR (Annual Percentage Rate) annualizes this cost, showing what the equivalent interest rate would be over a full year. Because you're paying a fee on the full $10,000 but only borrowing $8,000, and doing so for a short term, the annualized cost appears high. It's the most accurate way to compare factoring to a traditional bank loan.

What is the "reserve"?

The reserve is the portion of the invoice value that the factor holds back until your customer pays. It's calculated as (Invoice Amount - Upfront Advance). This money serves as collateral. Once the invoice is paid in full, the factor deducts their fee from the reserve and returns the remaining amount (the rebate) to you.

Are factoring fees always charged this way?

No. While a tiered-rate (e.g., % per 30 days) is very common, some factors charge a single flat fee regardless of when the customer pays (up to a limit, like 90 days). Always confirm the exact fee structure with your factoring provider, as this will impact your total cost.

Tool developed by Ugo Candido. Finance content reviewed by the CalcDomain Editorial Board.
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