Although invoice factoring has been standard practice in many industries for hundreds of years, some businesspeople still insist on treating it with an aura of mystique and misunderstanding. The reality of the situation is that invoice factoring is a straightforward process whereby you essentially borrow money from yourself. A factoring company “buys” your invoice, assuming the risk for that invoice and advancing you the funds of the invoice. It’s a quick, easy way of increasing your cash flow when times are lean, and doesn’t carry the risk or the headache of an exorbitant bank loan. If you’re considering invoice factoring for your business, you’ll need to know how the factoring rates work.
How Much Are You Paying for Your Finance?
When you get to the core of the issue, invoice factoring rates are about determining how much your financing is going to cost you. You don’t want to end up out of pocket when you were meant to increase your cash flow and the money you had to spend. Invoice factoring companies need to be transparent in order to stay in business. No matter whom you’re working with, there are always going to be rates and fees incurred by the services you’ve solicited. That’s just standard business practice. What you need, however, when you’re invoice factoring, is a company that discloses all its fees and rates up front so you aren’t caught off guard by unexpected expenses. The fees shouldn’t be confusing, and the company ought to clearly explain them to you before you do your first funding with them..
Invoice factoring is a partnership between your business and the factoring company. When the factoring company is working out its invoice factoring rates, it generally takes a few things into consideration, not least of which is the risk incurred by assuming responsibility for your invoices.
As a general rule, the factoring company will look at your customers’ buying habits and trends in your industry to determine the rates. Essentially, the higher the risk the factoring company takes on with your business, the more it will charge you in rates and fees. Healthy, current invoices are the most valuable to a factoring company, and thus incur a relatively low rate, as do those from customers who are known to be reliable and timely payers. Older invoices are riskier for factoring companies, and some companies don’t even take on invoices that are older than ninety days. They decide their rates base on your company’s sales volume, your customers’ reliability and, critically, their existing relationship with your business.. It’s critical that you build your relationship with the factoring company much as you build your relationship with your customers, as this will keep your rates relatively low.