What You Need to Know About Invoice Factoring Rates
Invoice factoring is a type of financing available to business owners that are in B2B or B2G industries. With different terminology and a handful of things to consider, such as invoice factoring rates, fees, and advance rates, invoice factoring may be a little bit challenging to understand.
However, if you’re considering invoice factoring for your business, it’s important to understand the rates and fees. This ensures that you’re working with the best invoice factoring company for your business.
Here are some points you might want to ask about potential Factors about invoice factoring rates:
1. How Factoring Advance Rates Work
People are often confused by the billing process of invoice factoring. Most people assume that the term ‘factoring interest rates’ is equivalent to the traditional APR’s, however, this isn’t the case. With invoice factoring, the percentage refers to a discount or the amount deducted from your business’ invoices as payments to the factor. For example, if your invoice is for $30,000 and the factoring company provides a 90% advance rate, the factoring company will give you $27,000 within 24 hours of invoicing. With invoice factoring, your business won’t have to wait 30-60 days to be paid. When the invoice is paid, the factoring company will collect a small fee and pass along the remaining balance.
2. Average Invoice Factoring Rates
Factoring companies consider multiple aspects when determining their rates. The best rates are usually associated with companies that have a diversified group of high creditworthy clients. In fact, some even pay as low as .5% per 30 days. Keep in mind that factoring companies consider the customer’s credit history, the debtor’s credit history, and the industry that you’re in.
3. Fees for Invoice Factoring
Factoring companies require their customers to pay servicing fees. Companies usually deduct it from the cash that is advanced to you. Aside from the fee, factors will also withhold a portion of the invoice to serve as added insurance. Once your factoring company receives the full payment from your customer, they will wire the ‘insurance money’ to you.
4. Different Fees for Different Clients
Factoring companies purchase invoices at a discount so that business owners can get paid now, rather than waiting 30-90 days. They will check the credit history of each customer before they approve the transaction. The fees you pay the Factors will depend on your customers’ risk. Similarly, banks charge higher interest rates for applicants without an impressive credit score. The higher the risk, the higher the fees.
5. Other Determinants Affecting the Cost for Invoice Factoring
Factors usually look at the following:
- The terms of the invoices
- The average dollar amount per invoice
- The number of invoices being factor
- The business industry
- Days sales outstanding (DSO)
Factors That Affect Invoice Factoring Rates
Factoring companies consider several factors when it comes to the rates and terms they assign your business. Here are the most common characteristics potential factoring companies will look at:
- Industry: Factoring companies often charge higher rates to businesses in high-risk industries. You can lower your risk by working with a factoring company that has had experience with your specific industry because many of them will not work with risky businesses. For instance, construction companies are considered high-risk. You might want to look for factors that specialized in construction financing.
- Customers’ Creditworthiness and Stability: Invoice factoring is dependent on your customers paying their invoices, the rates and terms of your loan largely depend on the creditworthiness and stability of your customers. If you work with reliable and creditworthy customers, it’s likely that you will qualify for better terms and lower rates compared to those that work with customers with poor credit ratings. In fact, you might not get approved at all.
- Business Creditworthiness and Stability: While it’s true that your customers’ credit ratings are more important, factoring companies would still want to know if your business is stable. Companies with a long and stable credit history will qualify for more favorable terms.
- Invoice Volume and Value: If your company processes fewer and larger invoices will most likely qualify for better rates because the factor doesn’t have to process a lot of invoices. On the contrary, factoring a high volume of invoices might lead to lower rates because factoring companies put in less work compared to how much they’re going to make.
- Relationship with Factoring Company: As you continue selling your invoices with your factoring company, you’ll begin to qualify lower rates. Factoring companies will become more familiar with your business and your customers as you continue to work with them. As a result, they might be able to give you better rates and terms.
Since most factoring rates vary drastically depending on companies and invoices, it’s important to understand how the billing works in invoice factoring. Most importantly, make sure to choose a lender that puts your business in the best position to succeed.