As a business owner, you might be thinking about factoring your invoices to gain access to cash more quickly. The good folk at Utah-based factoring company Thales Financial explain that there are numerous benefits to choosing this option over other types of business financing. Before going ahead though, you need to know what it will cost your business. This way you can make an informed decision about whether it is the right course of action for your company.
How Much Does Debt Factoring Cost?
Debt factoring does not generally involve a fixed fee. The factoring company will have rates it charges to customers, which will typically be set at a percentage of the invoice amount. So if a company wants to factor an invoice worth $2,000, they might be charged a fee of 2.5%. This means that the cost to the company for factoring in that particular invoice will be $50. However, the rate for factoring varies from one factoring company to the next. Some will charge as little as 1% of the invoice amount while others could charge up to 5%. The rate that you agree with the factor as well as the amount of the invoice will determine how much you end up paying.
There may be other fees associated with debt factoring that you need to be aware of. For example, the fee charged may not be a flat fee. It could apply to each week that it takes your customer to make the payment, past the due date. Hence, if you have a fee rate of 2.5% and your customer is late paying the invoice by two weeks, the fee you would pay would increase to 5%. Take the example above, if your customer pays the invoice on time, the fee would be $50. But if the customer does not pay for two weeks, the fee will rise to $100. Not all factoring companies work this way, though. Some will charge the fee and then charge daily interest on the amount due.
The Difference Between Recourse and Non-Recourse Factoring
Something to bear in mind is that you can often choose between a recourse and a non-recourse factoring agreement. In a recourse factoring agreement, the business is responsible for the debt if the customer does not pay. With a non-recourse agreement scenario, the factoring company takes on the debt and is responsible for any loss if the customer does not pay. In a non-recourse factoring agreement, the fee for factoring is generally higher.
Evaluating the Cost for Your Business
When you know the rate that you are being charged by the factor, it is easy enough to work out how much you are expected to pay for factoring each invoice. The higher the invoice amount, the more you’ll pay. Some companies charge different rates, depending on the amount of the invoice. Consequently, you might have to pay a higher rate for a larger invoice. The reason is that the factoring company is advancing more money.
While it is pretty simple to work out the initial cost of factoring your invoices, there are some costs that are harder to evaluate. For example, you just will not be able to tell when your customer is going to pay the invoice. If the customer pays late, your cost will increase.
To conclude, debt factoring is a finance option that allows businesses to effectively cash in their outstanding invoices with a third-party company. They receive a percentage of the value of the invoice from the factoring company and are then charged a fee. The cost of factoring depends very much on the terms of the agreement with the factoring company.