Factors That Affect the Cost of Hiring a Factoring Company

By: Chris Lanchech

discount fee, factoring company, cost of factoring
A factoring company can be the best solution for your company’s financial needs if your business currently requires a very quick infusion of cash.

A factoring company can be the best solution for your company’s financial needs if your business currently requires a very quick infusion of cash. Factoring companies can advance you the money owed by your customers, for a fee. This fee is called the discount rate, as it is the percentage of the face value of an invoice.

Generally, the discount rate can range from 1% to as much as 5% of the value of the invoices you submit to the factoring company. The discount rate is affected by several factors, including the following:

Factoring Service Fees

Some factoring companies may require their clients to pay a setup fee to avail of factoring services. These fees commonly range from $500 to $2000, which may help offset the costs, time and effort of running credit checks, assessing the customer’s ability to pay his debt, and validating the invoices. However, there are some factoring companies which do not require setup fees.

Your agreement with a particular factoring company also specifies if you are availing of recourse or non-recourse factoring. Non-recourse factoring is more expensive, as it allows you to pass on more of the risks of unpaid accounts.

Your Industry and Clients

The type of industry your business is in can affect the discount rate offered by factoring companies. Some industries involve more risk when collecting money is involved, and examples of these include the garment and textile industries.

If your industry is considered a high-risk field by factoring companies, then the costs for your company may be greater. Factoring companies may demand a higher discount rate as their fee, and they may even put a cap on the total money they may advance to your company.

Some clients are also riskier for factoring companies. Just as your personal credit rating and history is crucial for securing a loan and determining the interest rate, the reliability of your customers may also help determine the discount rate that factoring companies require. If your customers have a spotty repayment history and credit rating, then the discount rate invariably increases.

The Number of Invoices You Submit and Type of Billing

The greater the number of invoices you submit to factoring companies, the greater their workload becomes. Consequently, the discount rate will also increase.

A sum total of $100K in accounts receivables will come with a higher discount rate if it involves a hundred accounts of a thousand dollars each. But if that sum total involves just two accounts of $50K each, then the fee may be significantly lower, because the factoring companies do not have to contact as many customers to collect the money owed.

The method in which customers use to pay their accounts will also be a factor in determining the discount rate. If progressive billing is involved (in which customers pay in installments instead of paying in full at once), then the discount rate increases because the factoring company has to do more work.