If you are considering working with a Factor using Invoice Factoring to fund your B2B or B2G sales growth, it is essential to understand the factoring fees structure and cost. Comparing factoring rates can be challenging with different Factoring companies charging for their services in many ways.
What is the Best Transparent Factoring Pricing for You?
The cash flow and other factoring benefits need to be compared to your actual cost of funds to see if you are paying genuinely competitive rates for this secured receivable financing form of asset-based lending.
You need to know all the factoring fees, facts as well as your real factoring cost (with no hidden charges); everything that is in connection with your receivable funding, credit protection, and AR management.
What is a Factoring Company?
A Factoring Company or Factor is a commercial financing institution that buys a company’s invoices or accounts receivables. Factoring transactions can happen with no recourse (non-recourse) back to the seller or at full recourse. Instead of a business waiting 30 to 75 days for a customer payment, a factor gives them cash now.
What is Recourse and Non-Recourse Factoring?
With non-recourse factoring, a factor assumes responsibility for all bad debts. Non-recourse factoring is an advantage when a client’s customer files for bankruptcy, becomes insolvent, or via a protracted default.
What is a Typical Factoring Fee?
Depending on the Factoring company, this can be your only fee. At times, this can just be the fee to cover the factor’s risk and overhead. Primarily, it includes all of the collections work. Fees consist of the processing of invoices and collecting from your customers. It is typically charged based on the total value of the invoice amount you assign to the Factor. For many factoring providers, the fee covers the cost of funds for invoice financing.
What is an Advance Rate on Receivables?
Factors try to structure your advance rate percentage (between 70-92%) based on your gross margins, collateral quality, and historical dilution rate. For instance, security firm customers cannot return “labor.” As such, staffing agencies and guard services typically receive a 90% advance rate for their payroll funding on their government and creditworthy business client’s receivables.
How fast funding happens and invoices immediately turned into factoring cash is sometimes more significant than the advance rate. A factor’s goal, once your company is set up, is the same day funding as invoice receipt to improve your cash flow and to better manage cash. There are factors which aim quick funding with all debtors approved within 24 hours and same day financing.
What is a Discount Fee?
Some Factors split their fee, the Factoring Fee and the Discount Fee. The Discount Fee (or Discount Rate) is based and calculated on the amount of money that a Factor advances to you. You will also hear the term borrowing base. It is charged on the cleared current account balance. The basis for the calculation for the borrowing base is the agreed margin above LIBOR or the Prime interest rate. When comparing different companies where one charges a total Factoring Fee and one uses both, you must combine the two Discounts Fees to do a real cost of funds comparison.
What are Disbursements?
Disbursements are small fees that may be incurred in certain circumstances. For example, wire transfers or overnight delivery fees. The above charges will be shown as a separate total figure on your month end statement. Many Factors will offer ACH (Automated Clearing House) versus wire transfers and charge you less. ACH cost lower to the Factor than a disbursement by wire transfer.
What is Credit Insurance and How Does it Work?
Only a handful of Invoice Factors include Credit Protection Solutions or Non-Recourse Factoring through their Credit insurance policy in the Factoring Fee. A few factoring companies also offer without recourse as a separate line item. Credit Protection also allows us to fund the most industries served confidently. More importantly, credit protection enables you to sleep with security at night. It is essential to understand the different definitions of recourse vs. non-recourse invoice factoring that exists among factors. Usually, fees include a 100% outsourced credit and cash management.
Depending on the creditworthiness of your client or Account Debtor, it is essential to understand your exact at-risk situation and what is covered by credit protection. This is ultra critical in oilfield and truck factoring as your customer’s credit profile can change drastically overnight. Sadly, as many small business owners discovered in the last ten years, bad debt losses from unpaid invoices and overdue receivables from once creditworthy firms can ruin a business.
What is the Factoring Application Process?
Some factoring companies and, at least, one internet factoring broker charges an application fee. Some factors never charge an upfront application fee when processing your factoring application, only after a quick review of your extensive customer payment credit history, credit score, and your current collection process. Factors will then provide yours with a factoring proposal mapping out all costs and benefits to you; all that with no hidden fees. The goal is to turn your B2G or B2B outstanding invoices into immediate cash. This way you can get a handle on your payables, payroll, and other expense.
What are the Minimum Factoring Fees?
Factoring Rates depend on the monthly, quarterly or seasonal sales volume or cycle. You will see many Factoring providers tout their no minimums policy. However, these are typically at a much higher rate in the factor’s term contracts. Some factors like to give our clients a tiered factoring rate. That way, they can receive an award when they hit higher factored sales revenues and volumes. Other factoring companies might make you factor accounts from all your customers. However, some factors do not require you to factor all of your company’s invoices.
What is a Reserve Disbursement?
To increase yield, many factoring companies will hold your reserve longer. Our typical policy is we release your earned factoring reserves minus the factoring fees the following week after your customer’s invoice payments to our lockbox. We want to quickly pay you the final 10-20% of your invoice’s remaining balance and cover your payroll and other expenses. Reserve disbursement also helps hold down your factoring financing company costs. The historical percent of returned goods can also affect the factoring process if there is dilution with the payment received.
What are the Credit Terms Allowed by Factoring Companies?
Some factors only want invoices with payment terms of Net 45 days or less. However, some factors are happy to do cash advancement and pay terms up to Net 60 because of the credit protection program. You will also enjoy the quick review and approval process as it applies to your creditworthy customers.
How to Exit to Bank Financing?
Factors want you to become bankable one day and qualify for a business financing bank loan with their help. If your sales slow, balance sheet financial and personal credit improve to the point where bank financing is an option, factors will introduce you to trusted traditional bank lenders or asset-based lender contacts.
Invoice factoring is not algebra. At its most complex, it requires a small bit of multiplication. You and your CPA or accountant should understand the accounting math behind your cost of factoring. Also, what factoring means for the success of your business.