6. Factoring Costs

  1. Factoring fees are calculated as a percentage of invoice value, for example, most companies charge between 1-5% of an invoice total to provide factoring services.  These fess are taken out of the second, or remainder, payment after a customer has paid the balance on an outstanding invoice. 

    The rates you are able to qualify for depend on several different factors:

    • Your industry–Certain industries, such as the garment and textile industries, pose more of a risk when it comes to collecting from customers.  Businesses in these “risky” industries aren’t automatically disqualified from seeking factoring services, but they will probably pay higher rates. 

    • Your clients– Factoring services rely on your clients to make payments sufficient to cover their services.  Most factoring companies will require some proof of client’s creditworthiness and ability to repay before extending an offer.  Businesses that maintain accounts with established clients or large companies will likely receive a better discount rate.  Factors are also more willing to negotiate with businesses that are a “safe bet” when it comes to repayment.

    • Your invoices – Factors prefer a few large dollar amount invoices to many different invoices for smaller amounts.  Remember, the factor has to keep track of repayment, communicate with customers, and provide some level of customer service- the more work they have to do, the more expensive the transaction will be. 

    The type of factoring you choose can also have a big impact on the rates you’ll be offered.  Factors prefer less-risky, simple transactions- if you’re willing to sign a contract for recourse factoring (meaning you cover the costs of unpaid client invoices) you’ll be able to get much better rates. 

    Account setup costs

    Many accounts receivable factoring companies charge fees for account setup, in order to cover the costs of checking client credit references and evaluating invoices.  This is customary, and fees usually range from a few hundred dollars to a few thousand to open an account.  If you plan to use factoring services in the future for other invoices, leave the contract “open”- you’ll only have to pay the setup fee once and will have access to factoring services in the future when you need them.

     

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