2 Reasons to Ditch the Invoice Factoring Calculator | Behalf
2 Reasons to Ditch the Invoice Factoring Calculator
Factoring is a popular financing solution for companies with slow cash conversion cycles. The longer it takes companies to convert their inventory into profits, the more cash gets tied up in their business cycle. More often than not these companies offer trade credit or lenient payment terms, so they experience significant payment delays. They resort to factoring because it’s convenient. Selling receivables is fast cash and takes the burden of collections off of their accounts receivable department.
Though it seems quick and painless, factors cut deeply into profits, taking ~20% of total sales. Before you sign your receivables away to a factor, consider the cost. On average, the advance is only 60 to 80% the value of the receivables factored. Your company gets the remainder, less the cost of the factoring service, once customers complete payment. When shopping around for factors, pay attention to service fees. Competitive factors have an invoice factoring calculator on their site, so you can compare their service fees to that of other factors. Of course this method feels transparent, but a factoring calculator only gives a rough estimate and only takes into account some of the service fees. This article explains why your company should put down the factoring calculator and opt for an affordable alternative – customer financing.
1) Hidden Fees
Factoring calculators give a rough sense of the costs associated with the service, but what about hidden fees? The fine print tells you more about situational fees your company might encounter than a factoring calculator does. Factoring calculators are a marketing tool factors use to peak merchants’ interest, so they only include their most attractive fees and the ones they’re legally obligated to state. In reality, there are disbursement fees companies incur in special circumstances that can hike up the price. If you’re company is considering factoring, read the fine print carefully before you commit. Look for vague wording and ask questions to avoid getting blindsided. For example, look out for a minimum factoring fee. Some factors penalize merchants whose activity falls under a certain amount with a fee to make sure those accounts stay profitable. Factoring calculators often do not list the minimum factoring fees because it does not apply in their ideal use case. Factoring calculators can give a false sense of security, but smart shoppers will dig for a more comprehensive calculation to ensure they don’t make the wrong decision for their company.
2) Opportunity Cost
Another side of the coin a factoring calculator cannot begin to calculate is the opportunity cost your company might incur with a factoring solution. When companies factor invoices, they relinquish control. Factors take over the collections process, following up with customers to ensure they complete payment. The way they handle the collections process with your customers is completely up to them. For that reason, it is of utmost importance that you choose a factor that is just as committed to providing customers a seamless payment experience as your company is. In a sense, the factor becomes an extension of your business. If customers encounter less than stellar customer service from the factor, they hold you accountable. There’s no question that your company has invested energy, time and resources to cultivate its customer relations and it only takes one bad factoring experience to jeopardize them. A factoring calculator also cannot account for the lost sales opportunity. The cost of factoring comes directly out of profits, which can make it harder to track the expense.
The reality is your company should not have to turn to a factor to tide itself over. Your payment terms are a contract between you and your customers and those terms need to work for both of you. Offering business customers financing will change the dynamic of your relationship, evening the playing field. With a flexible payment solution like Behalf, you can get paid immediately while your customers get the flexibility to extend their payments up to six months. When your customers select their own payment plan, they take responsibility for any increased costs associated with their extended payment needs. In comparison to factoring, a solution like Behalf could reduce your costs over 90%. Put that in your factoring calculator.