How to Calculate the Effective APR on Invoice Factoring

Why APR Comparison Matters

Factoring companies quote fees per period (2% per 30 days). Banks quote annual percentage rates. MCAs use factor rates (1.25×). These aren't directly comparable without conversion.

Converting everything to APR lets you make an apples-to-apples comparison—but with an important caveat: factoring solves a different problem than a bank loan, so APR alone doesn't tell the whole story.

The Simple APR Formula

APR = (Fee Rate / Days Outstanding) × 365

Or equivalently:

APR = (Fee / Invoice Amount) / Days × 365

Example 1: 2% fee, invoice paid in 30 days

APR = (0.02 / 30) × 365 = 24.3%

Example 2: 1.5% fee, invoice paid in 45 days

APR = (0.015 / 45) × 365 = 12.2%

Example 3: 3% fee, invoice paid in 60 days

APR = (0.03 / 60) × 365 = 18.3%

Note that slower-paying customers actually reduce your effective APR because the same fee is spread over more days.

Accounting for All Fees

The simple calculation above only works if your factoring fee is the only cost. In reality, add other costs to the calculation:

Wire fees: If you pay $25 per wire on a $10,000 invoice, that's an additional 0.25% per transaction.

Monthly minimums: If you're required to pay a $500/month minimum and you only factor $20,000, that minimum adds 2.5% to your effective monthly cost.

ACH fees, processing fees: Add these to the numerator before calculating.

For the most accurate comparison, add up all costs for a month's worth of factoring and divide by the total invoice face value factored that month.

The Opportunity Cost Calculation

APR tells you the cost of factoring. But to know whether it's worth it, you need to compare that cost to what you can earn with the capital.

Scenario: You factor $100,000 in invoices per month at 2.5%, costing you $2,500/month. That same $100,000, deployed into new jobs, earns you $15,000 in gross profit. Net benefit: $12,500/month.

In this case, you're 'paying' 30% APR on capital that's generating a 180% return. The factoring math looks terrible in isolation but wonderful in context.

The real question for business owners is never 'Is factoring cheap?' but 'Is my return on this capital higher than the factoring cost?' For growing businesses, the answer is almost always yes.