How are the fees and advance amounts calculated?

Several things come into play:

  Fees can be anywhere from 2-5 % of what the invoice is worth.

So if an invoice is worth $1,000, a 3% fee would be $30.

What is an advance?

This is the money you get right away when we buy your invoice. The rest is given back to you once your customer pays up. Advances are typically between 60-95% of what the invoice is worth.

If an invoice is worth $1,000 and the advance rate is 80%, you get $800 right away. The leftover $200 (minus the factoring fee) is given back to you when your customer pays the bill.

How does this compare to a bank loan?

  At first glance, selling invoices seems more expensive than a bank loan. Here are some common questions that people who are thinking about selling invoices often ask.

Wow! 3 points per month! That's 36 percent per year! (Rates range from 1.5- 3 points)

It's easy to compare these rates to annual interest rates, but that's not really a fair comparison. Banks give loans and charge yearly interest, like 12 percent per year for example. We buy your invoices at a discount. These are two different things, and comparing them like this doesn't really work.

A bank only gives you money once, when you get the loan. We give you money continuously. For example, if you get a $100,000 loan from a bank at 12 percent, you get the $100,000 once and then pay $1,000 interest every month. But you still owe the original $100,000. A bank might also offer you a line of credit, which you use only when you need it. But they charge you for this privilege, and if you need to increase your line, you need to qualify all over again.

If you sell $100,000 worth of invoices each month for a year, you end up with $1.2 million over the year. That's much more than a one-time loan of $100,000 from a bank. If the fee is 3 points, you'd pay $36,000 in fees over the year, which is 3 percent of $1.2 million. And at the end of the year, you don't owe anything!

My business only makes a 3% profit. How can I afford to pay you 3 points?

  Even if your business only has a 3% profit margin, selling invoices can help you do more business. This means you'll make more money because your fixed costs don't increase as your volume does. This leads to a higher overall profit margin. As you do more business, your cost of production goes down and your profits go up. Fixed costs like rent, electricity, and insurance won't increase much (or at all) as your volume increases.

Here's an example assuming you can double your sales Without Selling Invoices:

Monthly Gross Sales-$50,000
Cost of Goods Sold-$30,000 60% of Gross Sales
Monthly Gross Profit-$20,000-40% of Gross Sales
Fixed Expenses-$10,000
Variable Expenses-$8,500-17% of Gross sales
Selling Invoices Fee-None
Total Expenses-$18,500-37% of Gross Sales
Monthly Net Profit-$1,500-3% of Gross Sales

With Selling Invoices:

Monthly Gross Sales-$100,000
Cost of Goods Sold-$60,000-60% of Gross Sales
Monthly Gross Profit-$40,000-40% of Gross Sales
Fixed Expenses-$10,000
Variable Expenses-$17,000-17% of Gross Sales
Selling Invoices Fee-$3,000-3% Fee
Total Expenses-$30,000-30% of Gross Sales
Monthly Net Profit-$10,000-10% of Gross Sales

But I only get 80% of my money upfront!

(Advances typically range from 80%-97%) Let's say the advance rate is 80%. And let's say you start selling invoices in January. You sell $100,000 worth of invoices, and we give you $80,000 right away. The rest of the money makes up the fee (3%) of $3,000 and the reserve (17%) of $17,000.

In February, you sell another $100,000 worth of invoices and get $80,000. But you also get your January reserve of $17,000 (assuming your customer pays in 30 days). So for February, you actually get 97% of your money, not 80%. From the second month onward, you're basically getting 97% of your cash flow.

But what if my customers take longer than 30 days to pay?

  You have a few choices. You could bill your client as usual and wait 30 days before selling that invoice. That way, you only pay the 30-day fee. Or you could sell the invoices of your faster-paying customers first to get the cash you need.