Should a job shop factor invoices to get paid faster on net 60 or net 90?

Follow both the advance and the reserve

Assume a delivered batch of 200 stainless shafts invoices for $20,000 and has fully allocated job cost of $16,000. A fictional factor offers an 85% advance, charges 2.5% of invoice face value for each started 30-day period, and adds $200 of total other fees. Assume the buyer pays exactly on day 60, triggering two periods, with no disputed parts, deductions or chargebacks. These are demonstration terms, not a market average or an offer.

The factor advances $17,000 and initially holds a $3,000 reserve. Its time fee is $20,000 × 2.5% × 2 = $1,000; total fees become $1,200. After collecting the full invoice, it releases $1,800 of reserve. The shop receives $18,800 overall, leaving $2,800 above the original job cost. The reserve was delayed cash, not an additional $3,000 expense.

A small delay can trigger another billing period

Under the assumed started-period rule, payment on day 61 instead of day 60 triggers a third $500 time fee. Total fees rise to $1,700, reserve released falls to $1,300 and remaining profit falls to $2,300. Ask the provider to price your customer's actual payment pattern, including approval delays and inspection holds, rather than the nominal net term alone.

The Federal Reserve's March 2025 explanation describes factoring as selling unpaid invoices at a discount, with the factor collecting from the customer and retaining a fee. It also explains why a factor rate is different from an APR. For this example, $1,200 / $17,000 × 365 / 60 = 42.94% is only a simple annualized cost comparison; actual timing, retained reserves and fee deductions affect a fuller cash-flow calculation.

Compare equal amounts of cash over equal days

For illustration, borrowing $17,000 for 60 days at an assumed 12% simple annual rate costs $335.34 before fees. That is cheaper than the example factoring fee, but only useful if the credit is approved and available when needed. An agreed material deposit or progress invoice may reduce the amount financed before the order is complete. Do not compare a deposit arriving before production with a factor advance arriving after delivery as if their timing were identical.

Read the proposed agreement for recourse, customer disputes, reserve release, minimum volume, unused-line fees, termination fees and any claim on other receivables. Ask exactly who bears nonpayment and what events permit the factor to demand repayment. A nonrecourse label is not enough information to assume that rejected parts or a buyer's debit memo are covered.

Prepare a decision sheet before signing

List one real invoice, its cost, earliest eligible funding date, net advance after upfront deductions, expected collection date and every fee. Run a second case with collection one billing period later. Have the provider confirm both cases in writing, including the reserve release date and customer notification process.

Then compare the fee with the contribution from the next order the advance would make possible. If the shop repeatedly needs financing to replace margin lost on the previous batch, correct pricing and payment terms first. Use accounting and legal advisers to review the actual financing agreement; the arithmetic here cannot establish its risk allocation.

• Calculate an early-payment discount
• Set a material deposit before production