Factoring services help businesses avoid the traditional headaches of collections and the lengthy collection delay from invoices that aren't due for 30 or 60 days. Before entering into an agreement with a factoring company, it's important for you to examine factoring rates and fees. You may want to check the terms of a few factoring companies to compare costs.
The advantage of receiving money up-front for goods sold rather than having to wait months for an invoice to come back as paid is worth the fees a business will pay to factoring companies. However, the fees charged by business factoring companies do vary, which is why it's a good idea to know what constitutes a high rate and what constitutes a low rate. Rates charged by factoring companies can vary from 1% to 7% or more.
It's also important to know the reserve amounts required by the factoring company, because these reserve amounts will impact your cash flow. A reserve is a percentage of the overall invoice amount that the factoring company retains until the invoice is collected. The reserve is necessary to cover potential bad debts. A common reserve amount is 15% to 20% of the invoice amount. Reserve amounts are much less for trucking factoring.
Some factoring companies charge additional fees that can quickly add up. It's common for factoring companies to charge application fees or wire transfer fees, but some fees are not so common such as
- Invoice handling fee
- Late payment fee
- Credit check fee
Future Rate Re-negotiations
It's important to remember that the rates and fees quoted by accounts receivable factoring companies aren't necessarily permanent. Over time, you may be able to negotiate better terms, particularly as your volume increases and your company grows. Ask the factoring company if they offer volume or loyalty discounts. This can help you make a decision on which factoring company will work best.
FactoringClub.com is the premier source of information for invoice factoring companies. With factoring companies in most major cities and states, FactoringClub helps you find the right factoring company. Search our listings or call our factoring experts at (866) 748-7111 for assistance.