The cash advance industry, lacking terms for their lending due to its recent arrival in the marketplace has adopted “factoring rate” as the description for what a cash advance lender charges for their loans. This rate is the supposed interest rate the borrower pays for borrowing working capital. To be honest I am not an expert on how these rates work within the cash advance lending community other than to say I hear there are many hidden fees that are added in for various terms and conditions with their loans.
But this term “factoring rate” should not be confused with a true factoring company’s “discount rate” which is technically a service charge for financing an invoice, not an interest rate for borrowing money. A service charge that a factor uses to purchase an invoice from their client encompasses many things beyond the actual interest on capital normally associated with borrowing capital. The service charge or discount fee includes due diligence on customers, verification of invoices and dispersing advances and reserves of the client’s account among other activities.
Accounts receivable factoring is unique in that financing invoices is not borrowing, it is financing an obligation owed by a creditworthy account debtor. Therefore the cost of financing strictly speaking is not an interest rate or what some are calling the “factoring rate.”