Guide
Factoring vs direct billing: compare the total cost
A factor quotes one percent. Your real cost is that percent plus extra periods, flat fees, a held-back reserve and who pays when the customer does not. Direct billing has a cost too: the time you wait. This guide gives you one method to put both on the same line.
In short
- Compare in dollars on one real invoice, not in headline percents.
- Count every fee on the schedule, including what grows when the customer pays late.
- Put a dollar value on waiting for direct billing. Use what your own cash gap costs you.
- Factoring speeds up cash on invoices you already sent. It does not fix an invoice that left out detention or lumper.
We are not a factor, a lender or an accountant. We name no companies and quote no fee levels. Get the contract terms in writing and ask your accountant about the tax side.
Where one invoice goes
Take one $3,000 invoice. Under a factoring contract it splits into three parts: the advance you get now, the reserve you get later, and the fees that come out of the reserve.
The advance is not the whole invoice. The reserve comes back only after the customer pays, minus fees. So the question is not "what is the percent". It is "how many dollars leave, and how fast does the rest arrive".
Try the numbers on your own terms in the factoring cost comparison.
The comparison in six steps
Pick a real invoice
Use an invoice you already sent. Note the amount and how many days that customer really took to pay.
Get the fee schedule in writing
First-period fee, length of the period, fee for each extra period, flat fees, advance rate, reserve release terms.
Add the fees
First fee, plus extra periods for a slow payer, plus every flat or per-use fee on the schedule.
Price the waiting
For direct billing, what does it cost you to wait for that cash? A credit line, a fuel card balance, a late truck payment. Use your own number.
Add the risk terms
Recourse or non-recourse, chargebacks, minimums, contract length. These do not fit one dollar figure, so list them beside the total.
Repeat with a slow payer
Rerun at a payer who takes twice as long. The cheaper option often flips.
What goes in the total
| Line | Factoring | Direct billing |
|---|---|---|
| Base fee | Percent of the invoice for the first period | None |
| Extra periods | Added fee for each block after the first period, so late payers cost more | None |
| Flat and per-use fees | Wire, ACH, same-day funding, processing, fuel-card or lockbox fees | Your bank's own fees, if any |
| Advance and reserve | You get part now. The rest returns when the customer pays, less fees. | Nothing now. All of it later. |
| Recourse | Recourse: you may owe the advance back if the customer never pays. Non-recourse: depends on the contract's definition of non-payment. | You carry the loss either way |
| Cost of waiting | Small, only on the reserve | Your cash gap, priced at what borrowing costs you |
| Contract terms | Minimums, length, termination, notices | Customer payment terms in the rate con |
total cost of factoring = base fee + extra period fees + flat fees total cost of direct billing = cash you carry x your cost of carrying it x days / 30
The second line uses a monthly cost of carrying cash. Set it from your own credit line, card or late-fee costs. If you carry nothing, the waiting cost may be near zero.
Worked example EXAMPLE VALUES
Every number below is invented. They are not offers, rates or market figures.
A $3,000 invoice. Invented factor terms: 3% for the first 30 days, 0.5% for each extra 10 days or part of one, a $10 flat fee per invoice, a 90% advance. Invented cost of carrying cash if you wait: 1.5% per 30 days. The advance arrives on day 2.
| Line | Customer pays day 28 | Customer pays day 47 |
|---|---|---|
| Base fee (3% of $3,000) | $90.00 | $90.00 |
| Extra periods | 0 periods, $0.00 | 2 periods, $30.00 |
| Flat fee | $10.00 | $10.00 |
| Factoring total | $100.00 | $130.00 |
| Reserve back | $200.00 | $170.00 |
| Days you carry $2,700 | 26 | 45 |
| Cost of waiting (direct) | $35.10 | $60.75 |
| Factoring costs more by | $64.90 | $69.25 |
Check the day 47 column. Late by 17 days past the 30-day period, which is 2 extra blocks of 10 days: 2 x 0.5% x $3,000 = $30. Fees: $90 + $30 + $10 = $130. Reserve: $3,000 - $2,700 - $130 = $170 back. Waiting: $2,700 x 1.5% = $40.50 per 30 days, times 45/30 = $60.75.
In this invented case factoring costs about $65 to $69 more than waiting. What you buy for it is 26 to 45 days earlier access to $2,700. Whether that is worth it depends on what the cash lets you do. If waiting means a missed fuel or a parked truck, your real cost of waiting is higher than 1.5%. Change the number and rerun.
Ask the factor to put it in writing
Keep it factual. Ask for numbers, not a pitch. Save the reply with the contract.
Do not forget
- A missing line. A factor advances on the invoice you sent. Detention left off the invoice is left off the advance too.
- One slow broker. A single payer who takes twice the usual time can change the total. Check by broker.
- Notice rules. Contracts may require you to send customers to a payment address. Read it.
- Only the percent. Compare dollars on the same invoice.
First, see if you billed everything. See which of your last 20 loads have unbilled detention or lumper.
Questions
Is factoring always more expensive than direct billing?
No. If you carry the cash on a high-cost credit line, or waiting makes you miss fuel or repairs, the waiting cost can be bigger than the fee. Run both on the same invoice with your own numbers.
What is the difference between recourse and non-recourse?
With recourse, you may have to take back the invoice or repay the advance if the customer does not pay. Non-recourse shifts some of that risk, but only under the contract's definition of non-payment. Read that definition. We are not a factor and cannot tell you how a given contract reads.
Can I factor only some invoices?
Some contracts allow it and some require all invoices or a minimum volume. Ask in writing before you sign.
Does the reserve count as a cost?
Not by itself. It is your money held back. It becomes a cost through the days you wait for it and the fees taken from it.
Does quick pay from a broker count as a third option?
Yes. Many brokers offer a faster payment for a discount. Compare it the same way: dollars off the invoice against the days saved. Check the discount in your rate con or broker agreement.
Related: factoring cost, broker payment delay, cashflow simulator, invoice aging, compare your options, broker payment delay guide, factoring vs quick pay, 13-week cash flow.
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