How do I annualise a 2% per 30 days factoring fee?

Divide by the right number

The fee is usually quoted against the invoice face value. Your cost is the fee against the cash you actually received.

Illustrative only — a $10,000 invoice, an 85% advance rate, and a 2% discount per 30 days.

You receive $8,500 today. The fee is 2% of $10,000 = $200. When the debtor pays, the reserve is released: $10,000 − $8,500 − $200 = $1,300 back to you, so total proceeds are $9,800.

For 30 days of funding, $200 on $8,500 is 2.3529%.

Scale it to a year

There are 365 / 30 = 12.1667 periods of thirty days in a year.

Simple annualisation: 2.3529% x 12.1667 = 28.6%.

Compounded: 1.023529 raised to the power 12.1667, minus one, is 32.7%.

Say which one you are quoting. Both are legitimate and they are not the same number.

Then check how the periods are counted

This is where the real money is.

On a book where invoices habitually settle a few days past a boundary, tiering is the single largest driver of the facility's cost, and it is often a sentence rather than a headline in the agreement.

What else belongs in the calculation

• Where the clock starts — invoice date, funding date, or the date the debtor is notified.
• Fees outside the discount — application, due diligence, wire, monthly minimum volume charges, and any charge for running credit on your debtors.
• Recourse. If an unpaid invoice comes back to you after 90 days, the cost of that invoice is not the discount, it is the whole advance.
• The minimum. A monthly minimum fee is a fixed cost that raises the effective rate on every dollar you do not factor.

Work out the average days your invoices actually take to settle, count how many billing periods that is under your contract's method, and multiply. The calculators will do the annualisation once you have the per-period fee and the real settlement pattern.

The monthly minimum is a rate multiplier

A minimum fee is quoted as a small fixed number and behaves like a large variable one whenever volume is light.

Illustrative only — a $1,000 monthly minimum on a facility where you factor $30,000 in a quiet month at 2% per 30 days. The earned discount is $600, so you pay the $1,000 minimum instead. Against the $25,500 advanced at an 85% rate, that is 3.92% for the period, which annualises on a simple basis to about 47.7% — on a facility whose headline is 2%.

The minimum is therefore a seasonality charge. Take your three lightest months from last year, apply the minimum to each, and see what the facility costs in the months you are least able to pay for it.

Use your real settlement pattern, not thirty days

The 30-day figure in the contract is a billing period, not a prediction about your customers.

Illustrative only — you factor $200,000 a year and your invoices settle on average at 38 days. Under a tiered structure, 38 days is two whole periods, so every invoice costs 4% of face rather than 2%: $8,000 a year rather than the $5,066.67 a pro-rata calculation would produce. Against the $170,000 advanced, 4% of face is 4.71% per 38 days, annualising simple to about 45.2%.

Pull your last hundred invoices, compute the average days from the date your contract starts the clock, and count how many whole periods that is under your agreement's method. That one number moves the cost of the facility further than anything you will negotiate on the headline rate.

Recourse is not a rate, it is a different exposure

On a recourse facility, an invoice the debtor does not pay comes back to you after a defined period. Illustrative only — a $10,000 invoice advanced at 85%: you repay the $8,500 you received plus the $200 discount, and you still have $10,000 to chase yourself.

That does not belong in an annualised figure. It belongs in a separate question: which of my customers could do this, and what is the largest single invoice outstanding with any of them?

On a non-recourse facility, read what the credit protection actually covers. Cover against a debtor's insolvency is not cover against a debtor who refuses to pay because of a dispute, and disputes are the more common reason an invoice goes unpaid.

What the annualised number is not comparing

A factoring facility is not only money. It is also credit checking on your customers, a ledger, collections work, and in some structures the credit risk itself. A term loan is money.

So a 45% annualised factoring cost and a 12% annualised loan are not directly comparable until you add back what you would spend doing the collections yourself and what the bad debt would cost. For some businesses that gap is substantial and factoring is the cheaper answer on a full accounting. For others the factor does very little and the annualised number is the whole story.

The way to tell is to ask what the facility includes, then price the parts. If the answer is that they advance against invoices while you still chase your own customers and carry your own credit risk, you are buying money, and the annualised rate is the right comparison.

Get these in one email before you sign

1. The discount rate, the period, and whether periods are pro-rata or tiered.
2. The date the clock starts — invoice, funding, or notification.
3. The advance rate, and when the reserve is released.
4. Every fee outside the discount, with amounts.
5. The monthly minimum, if there is one.
6. The recourse period and what triggers a chargeback.
7. The termination notice period and any early termination fee.

Then do the division yourself, on your own settlement pattern. The facility quoting the lowest discount is frequently not the cheapest one.