In invoice factoring, you can get an advance from a factor that’s equivalent to a percentage of the value of your invoice. With this advance, you will have some working capital to use instead of waiting for the invoice to become due.
When you compare factoring companies, you’ll need to compare their invoice factoring rates. The main problem is that different factors call their fees by different names, even though they may refer to the same type of service or fee.
Essentially, if you are doing comparisons you will have to get an exact quote on how much the funding will cost you. All the fees must be transparent before you sign an agreement. You’ll need to know exactly how much you’re getting in advance for whatever circumstances, and the fees of the factor must be stated up front. The conditions for the fees (and penalties should your customers pay late) should be clarified as well.
The invoice factoring rates you’ll need to be aware of include:
- This is the percentage of the value of the invoice. Some factors claim that they offer 70% of the value, while others say they offer up to 90% or even more. You’ll need to know if the advance rate is the same for all invoices or if there are some types of invoices which may come with a lower advance rate. You also need to check if the advance rate applies to the full worth of the invoice or if it applies to the net of VAT amount.
- Advance limit. This is the maximum amount that a factor may be able to give in advance for an invoice. So if the factor has a limit of $100,000 for each invoice, then even if they offer an 80% advance you only get the $100,000 even if the invoice is worth $200,000.
- Discount charge. This works like interest on a loan. It can be a fixed percentage or a few percentage points over the base rate or the prime lending rate.
- Additional fees. Some factors also charge additional “administrative fees” which may include setup fees, fixed annual fees, fixed annual fees per invoice, legal costs and extra percentage fees as well. For example, they may charge additional fees when they investigate the credit of your new customers. You may also be locked in a factoring contract, and opting out of the factoring service may require another fee.
What Affects Invoice Factoring Rates?
Every fee must be taken into account before you choose a factoring company to work with, although many factors are open to negotiation. Several considerations can increase or reduce the rates you pay. The info that affects the rate includes:
- Whether your customers are local or international
- The sales volume (per month or year)
- The average size of an invoice (the larger the size the lower the fee should be)
- The maturation of the invoices (whether the customer pays in 30 or 60 days)
- The creditworthiness of your customers
It’s said that invoice factoring rates can be more expensive than traditional bank loans. But then again, banks loans are nearly impossible to obtain, while invoice factoring is much easier and faster. For some businesses, that’s a fair trade.
