Have you been considering invoice factoring for your business? Are you concerned about the possible costs associated with factoring? The good news is that invoice factoring carries almost none of the usual costs you would expect with most financing options. Instead, factoring can be one of the more affordable ways to increase your cash flow.
Typical Factoring Costs
Generally, you'll only have to pay one fee when you sign up for invoice factoring - a due diligence fee or a setup fee. Depending on the company, this charge may be called a factoring fee. The factor will usually impose this fee to cover the cost of performing a credit check on the customer whose invoices you intend to factor.
Of course, if your customer never pays the invoice, you may have to deal with some other, more unpleasant costs like legal fees and interest payments on your factoring advance. You can avoid this, though, if you only factor invoices from customers who have a good payment record with you.
How Factoring Saves You Money
In most cases, invoice factoring actually saves the company money. For example, since the factor takes on the usual accounts receivable work you would have to perform, you can skip the cost of filing records, maintaining receivables and resending invoices. If you've been in the habit of offering cash discounts to customers who pay their invoices early, you no longer have to eat those costs either. Instead, you can get the full amount of your invoice (minus your due diligence fee, of course).
Factoring really saves you money when you compare it to more traditional forms of financing such as a bank loan. If you apply for a business or personal loan from a bank to help you cover your cash flow problems, you'll have to wait several days or even weeks to see if the loan is approved. In the meantime, your cash flow problem may get worse and endanger your business.
Even if you get the loan approved, you'll have to pay an initiation fee, interest, and closing costs. With invoice factoring, you can skip the interest and closing costs. Since your ability to factor will remain open, you don't have to worry about having to pay all those charges again when you need more funding.
When you take a good look at the costs associated with factoring, you may find that this financing option is the most affordable way for you to increase business funding.