Invoice factoring is often promoted as a simple way to boost cash flow when clients are slow to pay—but the costs can add up quickly if you’re not careful. For contractors, every dollar counts, and unexpected fees can quietly eat into your profit margins. While the base rate might seem reasonable, the fine print in many agreements reveals a range of hidden charges that can catch you off guard. In this post, we’ll break down the most common hidden fees in invoice factoring and how to avoid them so your business stays financially strong.
The Hidden Fees in Invoice Factoring: What to Watch Out For
At its core, invoice factoring means selling your unpaid invoices to a third party (the factoring company) for a percentage of their value—usually 70% to 90% upfront. Once your customer pays the invoice, you get the remainder, minus the factoring fee. Sounds simple enough, right?
Unfortunately, the simplicity ends there. Many factoring companies advertise low fees, but don’t highlight the extra charges that come later. Here are the most common ones we’ve seen:
1. Tiered or Incremental Fees
Many factoring companies charge on a weekly or monthly basis instead of offering a flat rate. So if your customer takes longer than expected to pay, your fees go up.
Let’s say you’re quoted a 2% rate—but that’s only for the first 30 days. If your customer takes 45 or 60 days to pay, you might end up paying another 1-2% for each extra 15-day period. This adds up quickly and can turn a reasonable fee into something much higher than you planned.
2. ACH and Wire Transfer Fees
Getting your funds quickly is often the main reason for choosing factoring, but be aware—speed costs money. Many factoring providers charge fees for sending your money via wire transfer or ACH. You could be charged $10, $25, or more per transaction, which adds up over time.
3. Due Diligence and Application Fees
Some factoring companies charge upfront “processing” or “application” fees before even reviewing your account. These charges might be small, but they’re still a red flag, especially if they don’t guarantee approval.
4. Minimum Volume Fees
If you don’t factor a certain amount of invoices each month, some companies will charge a penalty. This is often found in long-term contracts that require you to meet monthly or quarterly minimums—whether you need the service or not.
5. Early Termination Fees
Think you can test out a factoring company and switch later? Not so fast. Many long-term agreements come with steep early termination penalties if you try to exit before the contract period ends.
How to Protect Your Business from These Charges
As contractors, we know the importance of reading the fine print—whether it’s in a subcontractor agreement or a financing contract. Here are a few ways to protect your business:
Read Every Line of the Agreement
Don’t just focus on the headline rate. Ask specifically about any additional fees, how rates are calculated over time, and what penalties might come into play if customers pay late or if you reduce your factoring volume.
Choose Non-Recourse Factoring If Possible
With recourse factoring, you’re still on the hook if your customer doesn’t pay. Non-recourse factoring may come with a slightly higher fee, but it limits your risk.
Ask About Contract Terms Upfront
Avoid long-term commitments if you’re just getting started with invoice factoring. Look for companies that offer month-to-month agreements so you’re not locked into a service that doesn’t work for you.
Why Choose Prime Factoring
At Prime Factoring, we’ve worked with contractors, builders, and service providers who need flexible financing without the nasty surprises. We believe in transparency. That means no hidden fees, no volume penalties, and no fine print games.
We walk you through the entire factoring process from the start, breaking down exactly what you’ll pay—and what you won’t. Whether you’re dealing with slow-paying clients or waiting on retainage, we help you keep your business running smoothly without giving up more than you should.
If hidden fees in invoice factoring are keeping you up at night, we’re here to provide clear answers and fair rates. That’s what sets Prime Factoring apart.
In Summary
Invoice factoring can be a helpful financial tool, but you need to be careful. The hidden fees in invoice factoring can turn a simple solution into an expensive problem if you’re not paying close attention. By understanding what to look for—like tiered rates, ACH charges, and long-term penalties—you can make a smart decision that protects your business and your profits.
If you’re ready to factor your invoices without the headache of hidden charges, contact us at Prime Factoring. We’re here to help you build with confidence.
