Default rate
A higher fee or interest rate that may apply after a contract default.
Why it matters
A default rate is a higher fee or interest rate applied after a specific contract breach, such as failure to repay an overadvance, breach of a representation, or entry into an event of default. Default rates can substantially increase the cost of a factoring program during periods of operational difficulty, precisely when a business is least able to absorb additional fees. Default rates may apply retroactively to the outstanding balance, not just to new activity. Understanding the default rate and the conditions under which it applies helps sellers assess the total risk exposure of a factoring agreement.
How it appears in contracts
Default rate provisions appear in the Fee Schedule or Default section of the factoring agreement. Common language: upon the occurrence of an event of default, the factor may charge a default rate on all outstanding obligations in addition to standard fees. The default rate may be expressed as a flat annual percentage or as an increment over the standard rate. Sellers should confirm whether the default rate is applied to the outstanding advance balance, the invoice face value, or another amount, as the calculation basis significantly affects the total cost.
Related terms
Related reading
Sources
- Operating Authority - Federal Motor Carrier Safety Administration. Accessed 2026-05-19.
- International Factoring Association - International Factoring Association. Accessed 2026-05-19.