When you apply for a credit card, usually the rates are stated quite clearly, so you don’t actually have to negotiate with the credit card company unless you’re having trouble paying your monthly dues. But in accounts receivable factoring, the cost of the funding depends on several things.
The Factoring Company
Like any other shops, banks, or medical clinics, factoring companies set their own rates and charge fees as they see fit. The best factoring companies will be honest in what they will charge you, and they may take some time to explain what it will cost you for various scenarios. For example, there may be a penalty involved if you break a factoring contract early or if your customer pays late.
So now compare the costs of factoring offered by different companies. Check all the fees your factor charges so you won’t have to deal with unwanted surprises later on.
Some industries may charge more when you use factoring because of the inherent nature of the business. For example, in many cases medical receivable factoring can be more expensive because insurance companies are involved. On the other hand, factoring for trucking fleets tend to be simpler with higher cash advances because the job is not complicated at all.
The strength and stability of your customers is also a crucial consideration. When you deal with profitable and stable businesses as customers, then the costs/fees would be less.
Also, some factoring companies may charge less when they specialize in a particular industry, because their resources and services are already geared for that industry. A factoring company that specializes in the trucking industry will charge less than a generic factoring company if you’re in the trucking business.
The Aging Report
The aging report indicates the amounts owed to you by your customer, and it also says the length of time you give them to pay up on what they owe. Factoring companies will charge less if the customers regularly pay in 30 days than if you give them a 90-day term.
The Total Volume
If the total volume of your invoices is worth $500,000 a month, the rate will be lower than if the volume was just $30,000 a month. In fact, the factor would prefer to get all your invoices for funding. There’s an option where you can pick and choose which invoices would be factored (called spot factoring), but then the rate is higher. The rate may be as low as 2% of the value, or as high as 5%.
Like other lenders such as banks, factors prefer that you have fewer invoices with larger amounts involved when your customers are stable. That’s because they do the same work for each invoice, but get a percentage of the value of the invoice.
Finally, talk to more than one factor and negotiate with them. They may be inclined to offer generous terms if they know they have competition for your business. The costs of accounts receivable factoring aren’t set in stone until you sign your name on the dotted line.