It is quite difficult to stipulate the exact percentage factoring companies take in the United States. The percentage factoring companies take is typically around 1% and 5%; however, you have to note that this will vary depending on a number of factors.
Don’t also forget that the factoring rate is simply only a part of what you might have to deal with. Within the past few years, invoice factoring has grown to become a viable cash flow alternative, especially for trucking companies.
It makes it possible for businesses, such as trucking companies, to obtain payouts on their accounts receivables quicker than would traditionally be obtainable. Although the concept and process of invoice factoring is easy to comprehend, understanding precisely how much invoice factoring will cost is not as straightforward.
One thing to understand is that there is no standard cost for invoice factoring. The exact percentage you pay will most often depend on the viability of your business, as well as the reliability of your clients.
Most often, particularly for providers that offer a flat fee structure, the exact percentage will be more or less dependent on two things – the discount/factor rate and the length of the factoring period. A factoring company’s discount or factor rate is known to vary between 1.5% and 5%.
However, it is imperative to note that the higher the value of invoices you ‘hand over’, the lower your discount rate will be. Aside from that, the factoring period will depend on the duration it will take your clients to pay.
Have it in mind if the invoice factoring company has to wait 60 days for payment rather than 30 days, then the percentage will have to be more. Don’t forget many other charges that can apply such as service fees and collection fees as they can have an impact on the cost.
Factors That Determine the Percentage Factoring Companies Take
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Size and volume of transactions
Note that the size of each invoice and its volume will have a massive impact on your factoring fee and the percentage taken by the factoring company. Have it in mind that if you are able to guarantee a high volume of invoices, a factoring company will probably offer lower factoring fees.
Aside from that, it is in your interest to have your invoices factored less frequently since this limits the cost of factoring. For instance, processing one $40,000 invoice costs less than processing four $10,000 invoices.
This is another factor that will determine the exact percentage these businesses will take from your invoice. There are industries that are known to possess higher risk factors than others.
Have it in mind that industries like retail, agriculture and even accounting, for instance, are considered to be relatively high risk. Gambling and alcohol are rated to be overly risky. Others like scientific research, laboratory wholesalers, and even flying schools, are considered to be low risk.
The cost of factoring will most definitely vary by industry, and if you want to potentially reduce this factor, it is recommended you go for invoice factoring companies that specialize in your industry.
This is another factor that will have an impact on the percentage these businesses take. The factoring company might very well conduct credit checks at the very beginning to determine your financial health. Bad debts and poor credit over a long period will show that you are high risk. The factoring fee and the percentage they offer to take will most definitely reflect this.
You will want to consider the payments and punctuality track record of your customers as it will dictate how much you are charged or the percentage they take.
Have in mind that a business with a backlog of outstanding invoices from customers will seem quite risky to the factoring company. This will most often lead them to quote higher rates (in order to cover their credit protection) or even decline to work with you.
Customers’ payment terms
Most often, invoices have payment terms of 30 days. If your business has in the past concurred to a longer period (60 or even 90 days, for instance) then factoring charges will be higher.
Also, have it in mind that the factoring company might more or less charge the same discount charge over this period. According to industry experts, this is because the longer it takes for them to receive payment, the more risk they have to deal with.
Relationship with the factoring company
Just as with every other enterprise, relationships in the invoice finance industry are very vital. This is because trust is very necessary, especially within the processes involved. With time, your company can build a valid relationship with an invoice factoring provider that might lead to a better financial understanding, and this will mean a lower base rate for you.
Invoice factoring is with doubts a valid and well-known type of invoice finance. It is known to be favorable for companies that are in dire need of cash flow. Invoice factoring costs are usually cheaper than bank loans.
The precise percentage depends on the exact type of invoice factoring (notification or non-notification, recourse or non-recourse) used. Although it will most definitely vary as stated above, the factors above can help you anticipate how your business will be evaluated by service providers.