Businesses often factor their invoices in a bid to improve company cashflow. By getting immediate payment for a customer’s invoice from a third-party company, they do not have to wait the usual 30 or 60 days. This means they can pay their own bills in a timely manner. This all sounds great, but obviously debt factoring does not come without a cost. According to the financial experts at Thales Financial, the amount a company pays for factoring will be determined by the contract they have entered into.
How Much Will You Pay for Invoice Factoring?
When a company factors its invoices, it will be given most or all the outstanding invoice amount by the factoring company, often on the same day that invoices are submitted. It works in a similar way to an overdraft in that once a company accepts money from the factoring company for its outstanding invoices, it will need to pay interest. And like an overdraft facility, the business may also need to pay a set fee every month for the privilege of having it.
So, a factoring contract may include a monthly fee that the company will have to pay, regardless of how many invoices are factored. Nevertheless, the contract might have a stipulation that a certain number of invoices must be factored each month. If the customer is late paying the invoice, the business may pay a higher interest rate that increases daily or monthly.
The fee for a factoring contract is usually a percentage of the invoice amounts. If the contract stipulates that a set amount must be factored each month, the business will be paying a percentage of this amount, which could be between 1% and 5%, depending on the contract.
What businesses must be aware of too, though, is that many factoring invoices will include other costs. You may have to pay fees when the factoring company makes a transfer to your account. You might also be charged a fee if you do not meet your minimum monthly amount of factored invoices. And you might have to pay the factoring company for conducting credit checks on your customers.
A factoring contract will usually offer a recourse or non-recourse service. With a recourse service, the business is responsible for covering the cost of any partially or non-paid customer invoices. With a non-recourse service, the factoring company will take responsibility for covering these costs. But as you can imagine, such a service will come with a higher fee each month.
Is it Worth It?
If you are in need of quick access to cash and you know that your customers are generally quite good at making their payments on time, then invoice factoring could be a good solution for you. However, the type of contract you enter into will determine whether or not invoice factoring is worth it.
If you can get a reasonable fee which you can offset against discounts from your own suppliers for prompt or early payment, it may be worth utilizing such a service.
Nonetheless, if you often struggle to get payment from your customers, you may end up paying a high price for factoring your invoices and so might find that a bank loan is a better solution for raising some capital. After all, with a bank loan, you will have fixed repayments each month.
Conclusion
Invoice factoring is often a quick solution for some businesses when it comes to raising capital. However, it can become expensive, depending on the contract. You may have to pay a set fee every month plus interest that increases the longer invoices are outstanding.