How much does invoice factoring cost? What factors impact your rate? How can you offset those costs to make factoring worth it to your business?
Invoice factoring fees often range between 1-6% of the invoice value. The cost of factoring varies depending on how quickly your customers pay their invoices, the creditworthiness of your customers, and the volume and dollar amount of the invoices. For Flexent, factoring fees are typically comparable to the cost of accepting credit cards, making it a competitive and flexible financing option for businesses.
What Determines Your Invoice Factoring Rate?
Customer Creditworthiness:
Working with reliable customers who have strong credit histories can result in lower fees since the factoring company assumes less risk.
How Quickly Customers Pay:
Even if your customers pay reliably, they may not pay quickly. A factor needs to worry about cash flow too, and so the longer your customer takes to pay, the greater the expense to the factor, and therefore the higher the factoring fee.
Volume & Dollar Amount of Invoices:
A factoring company must evaluate and verify the information on your invoices. Therefore, submitting a hundred $1K invoices requires almost a hundred times more work than submitting one $100K invoice. This extra work impacts pricing.
The Factor’s Costs of Funds:
Not all factoring companies have access to the same cost of capital. Many factoring companies are funded by bank loans, internal capital, or external investors looking for a return. Often the most cost-effective factoring companies will be bank owned.
Alternatives to Invoice Factoring:
Some alternatives include offering quick pay discounts to your customers or accepting credit card payments. Both options have their benefits and drawbacks.
- Quick Pay Discounts: Quick pay discounts cost as much as you determine, but the standard is 2% of the invoice value. This option depends on your customer to take advantage of the discount, so it may not provide consistent cash flow.
- Credit Card Acceptance: Often credit card processing fees fall around 1.5-3.5%. Accepting credit cards means that your customers can pay you immediately, however it depends on whether they can secure the necessary credit.
Both options have their place, and the costs are comparable. Ultimately it comes down to the needs of your business. Quick pay discounts reduce your revenue, and may increase cash flow. Credit card processing is simple, and convenient for some businesses. Factoring provides immediate cash flow without depending on your customers.
How to Offset the Cost of Invoice Factoring
The question of whether or not factoring is too expensive comes down to a cost/benefit analysis. If increased cash flow could help you double your revenue, that’s probably worth it. But if the increased cash is going to sit idle, it probably isn’t. Below are some creative ways a company could use increased cash flow to increase efficiency and offset the cost:
Take Advantage of Supplier Discounts:
Suppliers may offer quick pay discounts or even volume discounts. Increasing cash flow enables you to take advantage of these benefits.
Increase Your Pricing:
Increasing prices isn’t something customers want to hear, but some businesses have leeway. Would increasing your prices by 3% cause you to lose customers? If not, it may be a good way to offset your factoring fees.
Improve Operational Efficiency:
Sometimes there are cost savings hidden in plain sight. Replacing old equipment or software may be expensive, but with next day cash flow, it may not be off the table, and could lead to greater cost savings in the future.
Learn more about Invoice Factoring: Factoring 101: The Ultimate Guide to Invoice Factoring
