subject: Don't pay to much for invoice factoring [print this page] When small business owners get in a position that cash flow is slowing growth or waiting for payments causes the the owner to juggle the bills around, then invoice factoring can make a lot of sense. However, its critical that the small business look at several factoring firms before making a decision as fees charged for factoring can very by 100%. The way invoice factoring works is that a business in need of factoring provides copies of invoices for business to business sales to the factor in exchange for an immediate payment on the invoice. This allows the small business to have the cash day one instead of waiting the traditional 30 to 60 days for payment. The factor typically advances 80% to 90% of the invoice total to the business and the factoring company waites for payment. The 20% to 10% not advanced is held in reserve until the payment arrives. Once the payment arrives the factor returns the funds held in reserve back to the business, less the factoring discount fee. The discount fee is a percentage of the total invoice (just like a quick pay discount) and can range from .59% to as high as 10%. The reason the factoring fee varies so much is based on the credit of the business owners clients and the volume of business the client provides to the factoring company. Another very important consideration is that each factoring company has a cost of funds to deal with, which is the cost they pay for the capital they have available for invoice factoring. Most factoring companies use a bank credit facility which is priced differently depending on which bank they do business with and how they look overall to the bank in terms of the risk associated with the facility. Some factoring companies have cost of funds as low as 2% APR, while others need to pay as high as 15% APR. Another way factoring companies get capital is from private investors, owner equity, and hedge funds. Just like with bank facilities the price they pay for capital can range from prime rate to 20%. The more the factoring firm pays for capital the more they need to charge you to make a reasonable profit. The bottom line is if your looking for invoice factoring you need to shop around until you find the best overall deal for your situation. Typically, the cheaper deals require more paper work, while the higher priced deals require little paperwork. To save time in the process it may also make sense to search for a factoring broker that can access rates to multiple factoring companies based on your needs. Invoice factoring is a great tool and does not have to be cost prohibitive if you do your homework.
