Two factoring quotes say 2%: compare the fee base and usable cash

Two factoring proposals can show the same percentage and deliver different cash. One fee may apply to the invoice's face value, another to the amount advanced, and either may change with the collection period. The useful comparison reconstructs the money received and the charges incurred under the written terms, starting with the same eligible invoice and payment date.

British Business Bank's invoice-finance checklist asks borrowers to examine margins, fees, collection responsibility and the agreement's duration. Those questions are linked. A cheaper fee can accompany a different service or a longer commitment, so the pricing table should sit beside the actual commercial scope rather than replace it.

Obtain a worked example from each provider and retain the relevant clause references. Identify the invoice amount, advance percentage, fee base, period covered and payment timing. Ask which other charges apply to that example. An indicative quotation may still depend on underwriting, customer eligibility or further conditions; keep that status visible.

Assume a hypothetical $100,000 invoice is eligible and is paid in full after thirty days. Both proposals advance 85% of face value, with the fee deducted immediately and the remaining 15% released when the customer pays. Ignore all other charges solely for this comparison.

Proposal A charges 2% of the $100,000 invoice, or $2,000. Its initial cash is $85,000 less $2,000, giving $83,000. The later release is $15,000, so the business receives $98,000 in total. Proposal B charges 2% of the $85,000 advance, or $1,700. It initially pays $83,300 and later releases $15,000, for $98,300 overall.

The difference is $300 despite identical headline percentages and advance rates. These are invented terms, not market quotations. If either agreement deducts charges later, retains additional amounts or applies a different base, the payment schedule changes. The provider should confirm the reconstruction before the business uses it to plan payroll or supplier payments.

The $15,000 withheld in the example is not automatically an additional cost. Under the stated assumptions it is received later. Treating it as both a fee and a later receipt would distort the economics, while treating it as cash available on day one would overstate immediate funding. Keep temporary withholding and permanent charges separate.

Likewise, a larger advance is a timing benefit rather than proof of a cheaper arrangement. The business may receive more cash initially but pay a larger fee or accept additional obligations. Compare the dated cash flows with the actual funding need. An extra advance that is not needed can still carry a price.

The SEC's financial-statement guide distinguishes cash movements from other financial measures. Apply that distinction here by preserving the invoice, advance, retained amount and settlement as separate components. Ask the accountant to determine the reporting treatment from the actual agreement; a commercial cash comparison does not decide whether a particular arrangement is accounted for as a sale or financing.

Now assume a different illustrative fee schedule: 2% of invoice face value covers the first thirty days, and each additional day costs 0.05% of face value. If the $100,000 invoice is paid on day forty-five, the extra fifteen days cost $750 and the total charge is $2,750. If the contract instead charges whole additional blocks of days, that daily calculation would be wrong.

Confirm when the charging period starts and stops. Invoice issue, funding, customer payment and cleared receipt can be different dates. Ask how weekends, bank processing and partial payments are handled under the proposal. Model the rules as written rather than choosing the most favorable event at each end.

Use the customer's observed payment pattern and any known acceptance conditions to choose scenarios. A stated thirty-day term is not evidence of thirty-day collection if invoices routinely wait for approval. The purpose is to understand how ordinary timing affects cost, with a separate review of any recourse or repayment obligation if collection fails.

Request the full schedule of setup, transfer, service, minimum-use and termination charges that could apply. Identify whether a fee applies per invoice, per customer, per month or across the facility. A low transaction rate can be expensive for a business that uses the arrangement only occasionally but commits to a recurring minimum.

Evaluate a representative period of use, not just the largest invoice. Include the invoices the provider considers eligible, expected advance dates and expected collections. If customer concentration limits or reserves reduce availability, use the resulting cash rather than applying the headline percentage to the whole receivables ledger.

Compare the service responsibilities as well. Establish who contacts customers, handles disputes, receives payments and supplies the information needed for settlement. If the business still performs work it expected the factor to take over, include that workload when evaluating the proposal. Do not treat an advertised service label as evidence that every collection task is included.

Prepare a comparison that states the initial net cash, later receipts, total fees, timing assumptions and continuing commitments. Show at least the expected collection case and a relevant delay. Keep questions about liability, security, assignment and exit conditions with the responsible finance and legal advisers so the cost comparison does not imply those issues are settled.

Do not label a simple fee-to-cash calculation as a regulatory annual percentage rate. Different structures, durations and legal disclosure requirements can require different treatment. If an annualized measure is needed, ask the qualified adviser to define it consistently and preserve the actual dated cash flows alongside it.

Approve the arrangement against a specific operating need and the complete proposal. After the first funded invoices settle, compare the provider's statement with the expected calculation. That focused check reveals whether the fee base, timing and deductions were understood before the business relies on the facility for a larger share of its cash cycle.