Don’t Let the APY Fool You: How to Think About Factoring Fees

Howard Abrahams
Jun 20
3 min read

Man in blue shirt reads documents at a desk with a laptop, plant, and shelves with boxes. Bright room creates a focused mood.

If you’re running a product-based business, you already know that waiting 60 days to get paid can feel like forever, especially when you’ve got inventory to reorder and purchase orders stacking up. That’s where factoring can help. However, to reap the full benefits, you need to understand how to evaluate the cost effectively.

Factoring is a smart way for growing businesses to unlock working capital without taking on traditional debt. But it’s easy to misinterpret the cost of factoring when you frame it the wrong way, especially if you try to compare it to an annual percentage yield (APY). Here’s a real-world breakdown of how to look at factoring fees more accurately and why that shift in thinking can make a major difference.

A Common Situation: Net 60 Payment Terms and Tight Margins

Let’s say you run a beverage company that sells to large retail chains like Whole Foods or Kroger. You ship $100,000 worth of product on Net 60 terms. That means you’ll wait two months to get paid, but in the meantime, you need to replenish inventory, pay suppliers, and fund the next round of production.

To speed up cash flow, you work with a factor:

You receive 90% of the invoice upfront
The factor charges a 3% fee on the face value ($3,000)
Your gross margin on the sale is 30% ($30,000)

Thinking Like a Bank Can Distort the Picture

If you treat the 3% fee like an APY, here’s what happens:

3% over 60 days annualizes to an 18%+ cost
That may look expensive next to traditional bank debt or a credit line

But before you let that number scare you off, let’s shift the way you look at the cost. You’re not borrowing money for the year. You’re accelerating cash on a one-time transaction. The APY comparison turns a helpful tool into a perceived liability.

Bar chart showing the impact of a $3,000 factoring fee on a $100,000 sale. It compares three bars: Gross Margin ($30,000 at 30%), Factoring Fee ($3,000 at 3%), and Net Margin After Factoring ($27,000 at 27%). The chart illustrates how factoring reduces gross margin but still leaves a healthy profit.

A Better Lens: Factoring Fee as Cost Against Gross Margin

Instead, consider the fee in the context of your sale:

Sale Amount	Gross Margin	Factoring Fee	Net Margin After Factoring
$100,000	$30,000 (30%)	$3,000	$27,000 (27%)

This is how smart operators look at it. They treat the factoring fee as part of the cost of goods sold, just like freight, packaging, or marketing expenses. If the remaining margin supports your business model, then factoring is simply a tactical expense to unlock growth.

When This Thinking Pays Off

Factoring works especially well for businesses that:

Have long payment terms (Net 30, 60, 90)
Operate with healthy gross margins (20%+)
Turn inventory quickly or need to scale fast
Use the funds to fulfill more orders or secure better supplier terms

If the capital you free up through factoring allows you to:

Fill more purchase orders
Negotiate early pay discounts
Maintain consistent inventory flow

...then you’re ahead, even if your margin dips slightly.

Don’t Let APY Math Distract You

Framing the factoring fee as an annual interest rate is a mental trap. Unless you’re revolving that debt for a whole year, the comparison doesn’t hold up. In most cases, the benefit of immediate capital outweighs the paper-based objection of a higher "rate."