If you are considering utilizing Invoice Factoring to fund your B2B or B2G sales growth, it is important to understand the invoice factoring fees structure and cost to you. Different Factoring companies can charge you for their services in many different ways. What is the best transparent factoring pricing for you? Here are factoring fees explained.
The cash flow and other factoring benefits need to be compared to your actual cost of funds to see if you are paying truly competitive rates for this secured receivable financing form of asset-based lending.
Our goal at Businesscash is for you to know all the factoring fees, facts and your real factoring cost (with no hidden costs) associated with your receivable funding, credit protection, and AR management.
Here is a Glossary of Invoice Factoring Rate Terms used to describe Factoring Fees:
What is a Factoring Company?
A Factoring Company or Factor is a commercial financing institution that buys a company’s invoices or accounts receivables. This transaction 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 like Businesscash assumes responsibility for all bad debts because of our client’s customer (the Account Debtor) filing bankruptcy, becoming insolvent or via a protracted default.
What is a Typical Factoring Fee?
Depending on the Factoring company this can be your only fee or this can be just the fee to cover the factor’s risk and overhead. Primarily it covers all of the collections work including the processing of invoices and collection from your customers, the account debtors. It is typically charged based on the total value of the invoice amount you assign to the Factor. For many factoring providers, this fee also covers their cost of funds for invoice financing.
What is an Advance Rate on Receivables?
We try to structure your advance rate percentage (between 70-92%) based on your gross margins, collateral quality, and historical dilution rate. For instance, a security firm customers cannot return “labor”, so staffing agencies and guard services typically receive a 90 percent 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. Our goal once your company is set up with us is the same day funding as invoice receipt for your improved cash flow and to better manage cash. Quick financing with all debtors approved within 24 hours and same day funding is our mantra at BusinessCash.
What is a Discount Fee?
Some Factors split their fee into two parts. The before mentioned Factoring Fee and the Discount Fee. The Discount Rate or Fee 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 and is calculated at the agreed margin above LIBOR or the Prime interest rate. When comparing different companies where one just charges a total Factoring Fee and one uses both, you must combine the two Discounts Fees so you can do a real cost of funds comparison.
What are Disbursements?
These 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 money as the cost for ACH is lower to the Factor than a disbursement by wire transfer.
What is Credit Insurance and How Does it Work?
Only a few Invoice Factors include Credit Protection Solutions or nonrecourse factoring via their Credit insurance policy in the Factoring Fee. Businesscash is one of that small universe of nonrecourse factoring companies. A few companies also offer without recourse as a separate line item. Credit Protection also allows us to confidently fund to the most industries served and more importantly, enables you to sleep with security at night. It is important to understand the different definitions of recourse vs nonrecourse invoice factoring that exists among factors. 100% outsourced credit and cash management is included in our fees.
Depending on the creditworthiness of your client or Account Debtor it is important to understand your true at-risk situation and what is covered by the credit protection. This is ultra critical in oilfield and truck factoring as your customer’s (the account debtor) credit profile can change drastically overnight. Sadly, as many small business owners discovered in the last 10 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. We never charge an upfront application fee when processing your factoring application. Only after a speedy review of your large customer payment credit history, credit score, and your current collection process, we will then provide yours with a factoring proposal mapping out all costs and benefits to you with no hidden fees. Our goal is to turn your B2G or B2B outstanding invoices into immediate cash so you can get a handle on your payables, payroll, and other expense.
What are the Minimum Factoring Fees?
Factoring Rates are based on 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. In our proposals to factoring prospects, we like to give our clients a tiered factoring rate so they can be rewarded when they hit higher factored sales revenues and volumes. Other factoring companies might make you factor accounts from all your customers, at Businesscash, we do not require all of your company’s invoices to be factored.
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 get you paid the final 10-20% of your invoice’s remaining balance so payroll and other expenses can be covered. This 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. We are happy to do cash advancement and pay terms up to Net 60 because of our credit protection program. You will also enjoy our quick review and approval process as it applies to your creditworthy customers. You will enjoy business invoice funding personalized with zero hidden costs at Businesscash!
How to Exit to Bank Financing
We want you to become bankable one day and qualify for a business financing bank loan with our help. If your sales slow, balance sheet financial and personal credit improve to the point where bank financing is an option, we will introduce you to our trusted traditional bank lenders or asset-based lender contacts.
Invoice factoring is not algebra and at its most complex requires a small bit of multiplication. We want you and your CPA or accountant to understand the accounting math behind your cost of factoring at Businesscash and what factoring means for the success of your business.