Invoice Factoring Rates: Financing at what cost? | Behalf
Invoice Factoring Rates: Financing at what cost?
Invoice factoring is a notoriously expensive way to get customers to pay for your company’s goods and services. Before your company commits to invoice factoring, you should consider the reason your company needs financing since invoice factoring could either hurt or help the situation. You want a solution that improves sales and helps your company grow, not weakens it.
This article discusses what invoice factoring is, how invoice factoring rates get determined, how much it can cost you, and if it’s worth the cost.
What is invoice factoring?
Companies sell their invoices to factoring companies for a cash advance when they don’t want to wait around for customers to pay. Invoice factoring is typically practiced by companies that extend trade credit to their business customers. The trade credit generously gives customers more time to pay for business purchases, but it leaves companies scrambling to collect payments from slow, non-paying customers. They turn to invoice factoring because it gives them faster access to the cash they make from their sales. In most cases, the money that factoring companies advance to their merchants is significantly less than the total amount of the invoices they buy.
What affects your company’s invoice factoring rate?
Invoice factoring rates are determined by two things: one is your factoring volume and second is the risk it (the factoring company) incurs by buying your invoices. For lower invoice factoring rates, there must be relatively low-risk to buying your company’s invoices and a high factoring volume. For higher invoice factoring rates, transactions are high-risk and the company has a low factoring volume. Invoice factoring companies get a better sense of these two attributes when they evaluate a company. Specifically, they look at the size of a company’s invoices, the company’s industry, financial stability, monthly factored volume, and the creditworthiness of its customers.
What is the invoice factoring rate? How much does factoring cost?
Invoice factoring rates are often confused with invoice factoring costs. An invoice factoring transaction is broken down into two parts: the advance and the rate. The advance is what percentage of the invoice you get up front, while the invoice factoring rate is the actual cost of financing. On average, a factoring company will advance 60-80% of the invoices. Specific invoice factoring rates and fees vary; for example, factoring fees range between 1-5% and brokerage fees up to 3%. Once the factoring company throws in its other related service fees, the cost is astronomical. In the end, invoice factoring can cost your company over 20% of its earnings, severely cutting into profit. In addition, low invoice factoring rates do not guarantee the lowest total cost. The total cost per dollar gives a better sense of how expensive invoice factoring is. Determining the total cost per dollar is what you want to focus on, but calculating it can be tricky. There are online factoring calculators that can help your company determine whether or not you can afford invoice factoring.
Is the cost of factoring worth it?
The bottom line is invoice factoring can dramatically reduce your company’s profit margin, taking over a fifth of your sales. For some, that alone is a deal breaker. If you’re still on the fence consider this: your company is ultimately responsible to the factoring company for any rates and fees you owe, as well as your customers that fail to pay their invoices. By the end of the factoring contract, your company may be worse off than it was in the beginning. The truth is there are other ways to close the gap between when your business customers makes purchases and when they pay; you can extend customer financing.
Offer your customers a purchasing line of credit that ensures you always get paid on time. Behalf is a way to offer your customers a purchasing line of credit, giving them the extended payment terms they need while ensuring you get paid fast. When you accept payment on your customer’s Behalf, they get up to $50k in funds and create their own payment plan with up to six months of extra time. They can use the funds to make larger, more frequent business purchases and regardless of the terms they choose, you always get paid in full within 1 business day. No paperwork. No recourse. No uncomfortable collections calls.
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