Most factoring transactions are structured by financing the invoice using two installments – the advance and the rebate. The advance is the installment that is wired to your account as soon as the factoring company receives the invoice that you want to finance. Depending on your transaction, the advance may range between 70% of the invoice up to 95% of the invoice. As you can see, there can be a very large difference in the advance rates. The rate is often determined by:
- Your industry
- The credit quality of your clients
- Your billing methods
- Your collections track record
- The diversity of your invoice portfolio
- Other risk factors
One easier way to view this, is that the advance rate shows the level of perceived risk that the invoice financing company sees in your invoice. The lower the risk, the higher the advance. Often, it’s that simple. Let’s examine some of these more closely.
One average, most companies get an advance rate of 80% to 85%. Companies in the transportation industry and staffing industries often qualify for higher advances. It’s common for staffing and trucking companies to get advances that start at 90%. And in some cases, some transportation companies can get an advance as high as 95%. On the other hand, companies in the medical or construction fields often get lower advances due to billing risk.
Credit Quality, Billing Methods and Track Record
These three variables are also important in determining the rate of your advance. Obviously, companies with good credit are very likely to pay within terms and are viewed as less risky. The same goes if you have solid billing methods and a good track record of getting paid on time by customers.
If your company has a diverse client base it will be seen as less risky by the finance company than if you only have one of two large concentrated clients.
Other Risk Factors
These are hard to quantify and are often judgement calls that are done by the underwriting team while reviewing your company. Things in your company background such as past due taxes, tax liens, lawsuits and unpaid loans are seen as increasing the risk, and therefore may yield a lower advance rate.