Factoring Fee (Discount Rate)
The factoring fee, also called the discount rate, is the cost a business pays a factor for purchasing its receivables. It is usually expressed as a percentage of the invoice face value and accrues either as a one-time flat charge or on a tiered schedule that grows the longer an invoice stays unpaid.
What the factoring fee covers
When a business sells an invoice to a factor, it does not receive the full face value. The factor advances a portion up front (see advance rate), holds the remainder in a reserve, and charges a fee for the service. That fee, the discount rate, is the factor's primary revenue and compensates it for funding the advance, carrying credit and collection risk, and administering the receivable.
The discount rate is a fee on the invoice amount, not an interest rate on the cash advanced. This distinction matters when comparing factoring to a line of credit, because a 2% fee on a 30-day invoice is not the same as 2% annual interest. More on that comparison below.
Common fee structures
Factoring agreements price the discount in one of two broad ways. The structure chosen affects both the total cost and how that cost behaves when debtors pay late.
Flat (one-time) discount
A flat fee charges a single percentage of the invoice face value regardless of when the invoice is collected, often paired with a separate charge if the invoice ages past a stated cap. For example, a flat 2.5% on a $10,000 invoice produces a $250 fee. Flat pricing is simple to forecast and is common where days sales outstanding is predictable.
Tiered (time-based) discount
A tiered structure increases the fee in steps the longer an invoice remains open. A typical schedule charges a base percentage for the first interval, then adds an incremental percentage for each additional period.
| Days outstanding | Cumulative discount |
|---|
| 1 to 30 | base rate |
| 31 to 45 | base + first increment |
| 46 to 60 | base + second increment |
| 61+ | continues to accrue |
Tiered pricing ties cost directly to collection speed, so faster-paying debtors lower the effective rate and slow payers raise it. It aligns the client's incentive with the factor's, since both benefit from prompt collection. The percentages above are illustrative placeholders, not market quotes.
What drives the discount rate
Factors price each facility to the risk and effort it represents. The main inputs are:
- Monthly volume. Larger, steadier receivable volume generally earns a lower rate because fixed servicing costs spread across more invoices.
- Invoice size and count. Many small invoices cost more to verify and collect than a few large ones, which pushes the rate up.
- Debtor credit quality. Receivables owed by financially strong, reliable payers carry less risk and price tighter.
- Average payment terms and days sales outstanding. Longer collection cycles mean the factor's capital is committed longer, raising the cost.
- Recourse terms. Whether the client repurchases uncollectible invoices materially affects pricing (see recourse vs non-recourse factoring). Non-recourse facilities cost more because the factor absorbs credit loss.
- Concentration and dilution. Heavy reliance on one debtor or a history of credits and short-pays adds risk and cost.
- Industry and seasonality. Sectors with disputes, returns, or long verification cycles tend to price higher.
Fees beyond the discount rate
The discount rate is rarely the only charge. A complete cost picture usually includes some combination of the following, all of which vary by agreement:
- An origination or facility setup fee at the start of the relationship.
- Monthly minimums or a minimum volume commitment.
- Wire, ACH, and lockbox processing fees.
- Charges for credit checks, field exams, or invoice verification.
- Termination or early-exit fees.
Reading the full schedule matters, because a low headline discount rate can be offset by ancillary fees that raise the all-in cost.
Discount rate vs APR
A discount rate is a fee on invoice value over a finite period, while APR annualizes the cost of borrowing. To compare them, annualize the fee. A 2% fee on a 30-day invoice is a 2% cost for roughly one-twelfth of a year, which annualizes to about 24% on the advanced amount, before considering the reserve and any ancillary fees.
This is why factoring can look inexpensive per invoice yet carry a high annualized cost relative to a traditional line of credit. The trade-off is access: factoring underwrites to debtor quality rather than the borrower's balance sheet, so it is often available where bank credit is not. Annualizing the discount rate, including all fees, is the only fair way to compare offers and to weigh factoring against other funding.
Verifying the fee you are charged
Because tiered fees depend on exact collection dates and because ancillary charges accumulate across many invoices, errors and disputes are common. Reconciling charged fees against the agreed schedule, confirmed payment dates, and applied credits keeps both sides accurate. Zolvo's reconciliation and invoice-verification tooling helps factors and their clients tie every fee back to a verified invoice and payment, so the discount actually charged matches the terms on paper.