November 3rd, 2006 | 
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Jeff Bross asked:
If you own a business that sells to other businesses, then you already know how important it is to keep the cash flowing. Invoice factoring is the process of selling your accounts receivable for immediate cash allowing the business to have funds within one day of generating the invoice, rather than waiting 30 to 75 days to get paid. Invoice factoring rates tend to be all over the place, depending on which factor you select to do business with. The factoring rate is the discount fee the factoring company charges to advance these funds to you. The factor then waits for payment from your customer. Most factors charge anywhere from 1% to 5% of the invoice total to provide these invoice advances.
Factoring rates can be structured in a variety of ways but what’s most typical is in a daily, 10 day, 15 day, or 30 day segment as a percentage of the invoice. Let’s say you have a staffing firm that is going to factor $50,000 per month and your factoring rate is 1% each 15 days. This means your cost of factoring on a 45 day customer would be 3% of the total invoice. If your customer paid within 30 days your rate would be 2%. If you compared this to offering a 2% quick pay discount to your customers the discount rate charged by the factor is in line with what your business is willing to give up for speedier payments and better cash flow.
After you decide if the factoring concept makes sense for your business, then start looking at factoring companies and get some quotes based on your overall deal for the factoring company. Most factors will want to review your customer list and accounts receivable aging report before providing a quote to determine the credit risk on the deal and how long they will be waiting for payment. Don’t be surprised if the factoring rates vary by up to 90% as each factoring companies expenses are not the same and some factors pay much more for the funds they use than other factoring companies. Additionally, you will have some factoring companies that provide more services that can drive up rates, but you may or may not want the additional services. If you really just need the cash flow, then the best factoring rate often makes the most sense as long as you read the contract carefully and do not find any hidden charges.
Invoice factoring is helping a lot of small business owners as banks have not been very helpful to this area of the business lending market. It’s very important to make sure you do not over pay for factoring services as it does not need to be expensive.
Discounting Accounts Receivable
If you own a business that sells to other businesses, then you already know how important it is to keep the cash flowing. Invoice factoring is the process of selling your accounts receivable for immediate cash allowing the business to have funds within one day of generating the invoice, rather than waiting 30 to 75 days to get paid. Invoice factoring rates tend to be all over the place, depending on which factor you select to do business with. The factoring rate is the discount fee the factoring company charges to advance these funds to you. The factor then waits for payment from your customer. Most factors charge anywhere from 1% to 5% of the invoice total to provide these invoice advances.
Factoring rates can be structured in a variety of ways but what’s most typical is in a daily, 10 day, 15 day, or 30 day segment as a percentage of the invoice. Let’s say you have a staffing firm that is going to factor $50,000 per month and your factoring rate is 1% each 15 days. This means your cost of factoring on a 45 day customer would be 3% of the total invoice. If your customer paid within 30 days your rate would be 2%. If you compared this to offering a 2% quick pay discount to your customers the discount rate charged by the factor is in line with what your business is willing to give up for speedier payments and better cash flow.
After you decide if the factoring concept makes sense for your business, then start looking at factoring companies and get some quotes based on your overall deal for the factoring company. Most factors will want to review your customer list and accounts receivable aging report before providing a quote to determine the credit risk on the deal and how long they will be waiting for payment. Don’t be surprised if the factoring rates vary by up to 90% as each factoring companies expenses are not the same and some factors pay much more for the funds they use than other factoring companies. Additionally, you will have some factoring companies that provide more services that can drive up rates, but you may or may not want the additional services. If you really just need the cash flow, then the best factoring rate often makes the most sense as long as you read the contract carefully and do not find any hidden charges.
Invoice factoring is helping a lot of small business owners as banks have not been very helpful to this area of the business lending market. It’s very important to make sure you do not over pay for factoring services as it does not need to be expensive.
Discounting Accounts Receivable
About Wade Henderson
Wade Henderson: Domestic and International Business Finance since 1995 specializing in challenge situations. "We prefer to find a way to get your loan done as opposed to finding a reason to turn it down.” Connect with me on Google+
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