A Business Can Grow Sky-high by Utilizing Invoice Factoring.
Here’s the Key to Minimize Your Fees:
Factoring has always been a mainstream and viable funding solution for companies in growth mode that need cash flow. The entry of many “Fintech” lenders has caused a broadened awareness of alternative funding options. However, many of these new alternative Fintech funding options are a wolf in sheep’s clothing.
Unclear fees and annualized interest rates can easily reach triple digits. On the other hand, factoring is a proven method of effectively financing the growth of a company. It has become much more prevalent in modern times, although it’s been around since the Roman Empire.
Historically, factoring had a high concentration in a few industries. Now any company that has Business-2-Business receivables 30, 60 or 90 days out, is a prime candidate for factoring.
Understanding what factoring is and how much it costs along with a comparison of funding options will help you make an educated decision to determine if factoring is a bright idea for your business.
How Factoring Works
Factoring is an a cash advance on the face value of your accounts receivable. The decision to fund is based upon the credit-worthiness of your customers. Typically, a factor advances 80% of your invoice amount immediately upon receiving and verifying your invoice.
When your customer pays your invoice, the factor places the remaining 20% into your Special Reserve account. Once the payments clear, the factor subtracts his fee and remits the difference to you.
The Costs of Factoring
Some factoring companies promote a loss leader initial “teaser” fee, counting on the fact that many people don’t understand how factoring fees work, the time/value of money and when your customer’s usually pay their bills. Depending on the number of days your customer takes to pay your invoices, you can end up paying higher fees than initially anticipated because of a different fee structure.
Here are a couple of examples that you can follow to calculate your actual factoring fee on an invoiced amount of $10,000:
Factoring Fee Offer Sample #1:
1.25% for each 30-day period an invoice is open
Days for Invoice to be Payed: 30
Invoice Value $10,000
Fee Calculation: 1.25%
Actual Fees: $125
Days for Invoice to be Payed: 41
Invoice Value $10,000
Fee Calculation: 1.25% x 2 = 2.50%
Actual Fees: $250
Days for Invoice to be Payed: 58
Invoice Value $10,000
Fee Calculation: 1.25% x 2 = 2.50%
Actual Fees: $250
Factoring Fee Sample Offer #2:
0.25% for each 5-day period an invoice is open
Days for Invoice to be Payed: 30
Invoice Value $10,000
Fee Calculation: 0.25% x 6 = 1.50%
Actual Fees: $150
Days for Invoice to be Payed: 41
Invoice Value $10,000
Fee Calculation: 0.25% x 9 = 2.25%
Actual Fees: $225
Days for Invoice to be Payed: 58
Invoice Value $10,000
Fee Calculation: 0.25% x 12 = 3.00%
Actual Fees: $300
Be Careful to Avoid Hidden Pitfalls
Among the things to avoid in a factoring deal are upfront fees (like application fees) and long-term contracts with early termination penalties. Be sure you read every word of your contract to ensure these items are clearly addressed prior to entering into an agreement.
If your company is poised for expansion and you need funding alternatives to facilitate that growth, or if you simply have outstanding receivables that need attention, contact us. We can help you discuss alternatives with a no-obligation evaluation and provide several different fee structures tailored to your particular needs.