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Is cheap invoice factoring available?

Many business owners attempt to compare APR interest rates to invoice factoring rates. The problem is two-fold.

  1. The best factoring company’s rates include Accounts Receivable Management, Credit Services, and Credit Protection; and
  2. A bank only helps the most creditworthy company with typically three years of proven profitability.

Here is a simplified explanation of how factoring works and what it would cost you.

What are Possible Factoring Fees Based on Time Frame?

Length of Time for Payment Invoice Factoring Rate
20 days 1.00%
30 days 1.50%
45 days 2.50%
60 days 3.00%

Keep in mind that a good factoring company will work with you based on your customer’s payment history. Also, make sure your terms are favorable to you. See Time Frame below to learn more.

Time Frame:

Your customers pay in a particular pattern. If your customers all pay in 37 days, then a fee based on 30-day increments would be slightly more costly. That’s because you will end up paying additional factoring fees based on the extra seven days. Factors can design your fees based on your unique situation – daily, 10-day increments, 60-day flat fee, etc.

Other Factoring Fees:

A Factoring Company can charge you for wire transfer, credit checks, unused line fees, early payment, monthly minimum fees, to list a few. Like banks and credit card companies, factors can get creative with their fees. However, some factors aim to keep these fees to a minimum.

What is a Factoring Advance Rate? 

A factoring advance rate is the percentage measure of the amount you receive (usually by wire transfer or ACH) in cash when factoring the invoice. Advance rates typically range from 80% to 90% of your invoice amount. Meaning, if you factor an invoice for $100,000, you generally are advanced $80,000(80%) or $90,000(90%).

Your factoring advance rate is the most significant number when looking at factoring costs, it’s even more critical than the fees. Why? The reason you are factoring is to improve your cash flow. The advance rate needs to be high enough to cover your cost of goods sold. Otherwise, the benefit of using factoring for your cash flow issues would not be available to you.

Why do some companies get 90% and others 80%?

The exact advance rate that a company will receive mainly depends if they are a service-based company or a goods-based company. For example, staffing companies typically produce some of the highest advance rates of up to 90%. You can’t return “labor,” and your people and the costs associated with employees need to receive the payment weekly. Companies providing goods would be closer to 80%. They normally have higher gross profit margins (20-40%) and invoice payment dilution issues such as returned products and manufacturer marketing fees.

How do Factoring Fees Work?

How you are charged for the duration the invoice is unpaid by your customer is the second most critical number. Your volume of business done with the factoring company, your client concentration (having very few customers), and the creditworthiness of your customer is the primary determining factor of this number.

Keep in mind that a factoring fee is not an APR or interest rate. Many times business owners are confused and apply interest rate formulas to factoring, but it just does not work that way. A factoring fee is similar to how your credit card might charge a monthly or daily set fee to have the account open. This is similar to how a factoring fee works. It is a percentage of the invoice amount. A factor applies a proportion of the invoice amount as their fee to you as low as 0.79-2.29% up to 30 days.

Example of an invoice factoring arrangement:

Your nursing staffing agency has an outstanding invoice for $100,000 from an excellent quality customer. The only problem with your customer is their payment term of 45 days. You are a staffing service-based company with the right, creditworthy customer. You will earn a 90% advance rate. Most of your expenses are payroll. It is essential to make sure you have working capital consistently flowing in to pay your temp nurses and payroll taxes, suta, futa, and workman’s comp premiums.

After verifying the $100,000 invoice, your nurse staffing company receives a same-day wire transfer of $90,000 into your bank account from us, your factoring company.

You are charged a fee from the factor which varies based on how long it will take for your customer to pay. For example, your fee is 1.5% for the first 30 days; an invoice is outstanding. In this case, your fee would be $1500. Your customer pays in full within 30 days, and the factor will wire you the outstanding balance minus the $1500 fee. In this scenario, you received $98,500 out of the $100,000 original invoice and got 90% of its upfront for a $1500 fee. There are other minimal fees, such as wire transfers. See Other Fees below.

Unearned Factoring Reserve Retained:

With client concentration or dilution issues, a factoring company might retain a percent of your reserves or balance after giving you initial cash in advance. Let us look back at the example above; if you were advanced $90,000, your unearned reserve equals the balance of $10,000. If there are no issues or unpaid fees, you will get the $10,000 minus the factoring fees once invoices are paid.

Earned Factoring Reserve Released:

A factoring company will wire you the Reserve Retained. How often a factor releases your earned reserve will impact your total cash flow. Do they publish weekly on paid invoices or paid batches of invoices? Knowing when your money is released is critical and affects your cash flow and correct factoring rate.

How does Invoice Factoring Rates Compare to Merchant Cash Advance or ACH loans?

MCA Loans can be 4-10 times more expensive with onerous terms! Please visit a blog from Paragon Financial for more information.

We firmly believe in treating our clients fairly and giving them the best and easiest ways to understand factoring fees.

Ready to get funded by an experienced factoring company with a simple and easy to understand fee structure? Call (888) 400-5930 or complete our fast, safe & secure online funding application.

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