Factoring companies will look at all of the above criteria to help determine their rate. A higher volume of invoices in a service-oriented business with shorter terms will typically get the best rates. You could find yourself paying 4% or less for the entire transaction. If the payment terms of the invoices have already gone beyond 30 days, you may pay up to 7%. Determination will depend on the customer’s industry and credit history. Experienced factor lenders know that certain business types; such as large cable companies, regularly take longer to resolve individual invoices than other businesses.
Opting for invoice factoring over other financing choices is only the first step. Once you have decided on non-bank financing to improve cash flow in your business, you need to investigate your average factoring rate and the total cost of invoice factoring. Usually, the rates for an average factoring fee would depend on the Factoring company. However, you want to make sure your overall cost is the best value for the money you spend on cash advances.
How much does it Cost to Factor Invoices?
There is often some confusion with the billing process of invoice factoring. You may see the term “factoring interest rates” and assume that this is equivalent to the APR we associate with bank loans. That is not the case. With invoice factoring, the percentage mentioned is referring to the amount minus your invoices as payment.
If you are asking for a cash advance on an invoice for $30,000 and the factoring company promises 90% upfront, then they are going to advance you $27,000. There are no factoring interest rates in the way there are with typical bank loans. With this type of cash loan for your business, you do not need to make payments over an extended period.
What are the Fees for Invoice Factoring?
Factoring receivables will require that you pay fees for the service. These are deducted from the amount of cash advanced to you, in a way you are getting a loan, but you have already paid for it. The factoring company will withhold a certain percentage of the invoice, not only to cover the fees but also as added insurance for them. After receiving the full payment from your customer, we’ll wire you the payment minus the fees.
Why Do the Fees Differ for Invoice Factoring When Using the Same Service Provider?
A factoring company is lending money against your customers’ invoices. They will look at the credit history of those customers before agreeing to the transaction, and base the amount of the fee on their risk. This is not any different than a bank charging higher interest rates for applicants with lower credit scores. The more risk involved, the more you can expect to have deducted upfront.
Are There Other Considerations to Determine Costs for Invoice Factoring?
- The number of invoices you are asking to factor.
- The average amount of those invoices.
- What are the terms of the invoices?
- How many days are left outstanding (DSO)?
- Your specific industry.
The Fine Print in Invoice Factoring
Non-bank financial organizations that are advertising rates that seem too good to be true are usually not being frank about their practice. Low rates may only apply if you are factoring beyond a specific amount of invoices. Otherwise, it could just be for a certain number of days. In that case, if your customer does not pay according to the terms set by the factor, you may need to pay extra. Be wary of factoring deals that seem too good to be true, and make sure to ask the right questions.
Factoring interest rates can vary drastically; not only from one company to another but with your invoices too. The important thing is to understand how the billing for this type of alternative financing works. Most importantly, that you choose a lender that gives you the best rates basing on your circumstances.