Financial Factoring Can Make Sense If The Factoring Rates Are Reasonable
Financial factoring has recently made a big comeback as banks have turned away small business loans in record numbers. Factoring companies can finance a business based on advancing funds against the company's accounts receivables. This kind of structure allows the factor to make credit decisions based on the current snapshot of the business and future sales, while banks look at the past to make credit decisions. The big knock against factoring invoices has typically been the expense, but if factoring rates are checked with multiple factoring companies these rates can often be secured at a reasonable expense.
The way factoring provides the benefits of a bank loan is by providing advances on accounts receivable which can be as high as 99%, but average around 80%. The typical bank loan based on accounts receivable is normally at 80% of the accounts receivable in good standing. Each time the business submits invoices to the factoring company they are taking an advance on the invoices so they can have funds to cover expenses immediately instead of waiting 30 to 60 days to get paid. This can work wonders if you need working capital for your business.
Each factoring firm has expenses and cost of funds that can vary by 50% or more. This of course means the rates that they charge customers for factoring services can vary by more than 50%. Since the expense of factoring is a discount fee based of the total value of the invoice your cost can range from 1% to 5% per 30 day period. As you can see this is a huge difference in your cost of funds. Depending on how much your sales will be per month you could save a tremendous amount of money and profits by shopping around for the best priced deal. Some factors will tell you they cost more because they offer better service, but this can be checked by checking references in advance. It makes no sense to pay more for money, just like when you select a bank.
Unfortunately, a few factoring companies been offering low rates, but then adding additional fees for services that should be included. Make sure to eliminate any factoring company that attempts to charge an "express funding fee" or "same day funding fee" as an additional charge. The entire concept of factoring is getting cash for your invoices and they should not hold on to them for several days before funding in an attempt to charge an additional fee to do the job they should be doing in the first place. This practice is a disgrace to the industry and we have seen several factoring companies trying to do this to companies that need cash quickly for payroll and other expenses. Also watch out for factors charging extra fees for credit checks, mailing invoices, or charging more than $20 for a wire transfer. Again, please read the contract or proposal very carefully to ensure you're getting a good deal overall.
Factoring can be a great cash flow solution for businesses, but it's critical to look at several financial factoring companies before making a final decision. You can reduce your cost of funds by as much as 50%, by simply looking at more than one factoring company and that can make a big difference to your bottom line.
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