If you are looking for financial advice from your invoice factoring company, you will want to be aware of a fee called a discount rate. The fees for collecting payment from clients that still have open invoices can run anywhere from 1% to 5% of your submitted accounts receivables value. For the most part, the fees generally range from 3% to 5%. A number of different elements provide insight on how a factoring company will decide upon a rate offered.
Certain elements can affect the up-front percentages and fees offered. These elements include:
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Type of billing Because it requires more work for the factor, discount rates will be more expensive for progressive factoring that non-progressive factoring.
Your clients – Factoring depends not only on how much your business is owned, but also the ability of your clients to repay and their credit worthiness. If you continuously work with and maintain open accounts with clients that have an established repayment history and a good credit rating, you will generally receive a better discount rate. Business owners that maintain relationships with steadily paying clients have more room for negotiation with their factor.
Type of factoring If you want the accounts receivable factoring company to assume all the responsibility for unpaid accounts receivable, you can expect to spend more for these types of factoring service. At the same time, this process will increase the factors risk considerably. This service is also known as non-recourse factoring.
Number of invoices Obviously, each invoice you submit to a factor for an advance will increase their workload. To reduce workloads but still receive ample amount in the cash advance, try submitting fewer high-dollar invoices over a larger number of low-dollar invoices to decrease the amount of work for the factor. This may also generate the possibility of negotiating a better discount rate if your factor does not automatically offer it.
Your industry – Certain industries naturally carry more risk than others when it comes to collecting money on their open invoices. Textile and garment industries are examples of businesses in a higher-risk field. Factor will most likely require a higher discount rate in similar high risk businesses. Factoring companies working with a high-risk business might also possibly put limitations on the amount of funding that they are eligible to receive up front.
Setup costs for your account
You will find that some factoring companies will charge an account setup fee to businesses who want to take advantage of their services. These fees can range from $500 to over $2,000, and are used to help cover the costs of a factors time in running credit reports and validating your client’s invoices and abilities to pay their invoices. Not all factors require setup fees, but this one-time charge is common in the industry. When you start shopping around for various vendors, compare prices of initial set up fees and determine the best company to work with, in regards to your budget.
