As a business owner, you want to utilize finance options that come with the lowest interest rates and most affordable fees possible. You may believe at first that your best option would be to take out a business loan at a bank. However, in reality this option could cost you much more than factoring would in the long run.
Factoring, in fact, can save you money and help you get the financing you need to grow your business. You can decide if this financial transaction is right for you by learning more about the fees and costs associated with this option.
Discount or Transaction Fee
Many business owners think that the discount fee, sometimes known as the transaction fee, is more expensive than a loan. This fee is typically between two and ten percent and is a single fee that is applied to a single invoice purchase transaction. It is not, as many people mistakenly believe, a fee that is charged every month and thus translates into an APR that is between 24 and 120 percent.
Instead, this fee is typically a low, one-time charge that the factor applies to a single purchase of your invoices. If you have $100,000 in unpaid invoices that you want to factor and the fee is three percent, you will be paid $97,000 for your invoices. This fee allows the factor to make a profit and you to recoup most of your owed invoice totals without having to wait for your clients to pay them.
One-Time Set-Up Fee
Along with a discount fee, you may be charged a one-time set up fee if you are a new customer. This fee could be as much as $2000. It also may depend on how much you want to factor and what kind of business you operate.
Once you pay this one-time set up fee, you can effectively enjoy a relationship with the factor without having to pay this expense again. It is not unlike setting up an account with any other bank or credit union, in fact.
Details That Affect Your Fees and Rates
As with any financial transaction, a number of different criteria can affect the amount of fees and interest you pay. With factoring, these criteria are a bit different than those scrutinized by a bank or credit union. You can utilize factoring to your advantage when you understand what details could come into play with your particular transaction.
For example, many factors consider details like:
- Your invoice customers' credit and bill paying histories
- The riskiness associated with your company or industry
- The likelihood of your clients defaulting on their invoices for that particular transaction
If your clients have good credit and bill paying records, you are less likely to incur high fees with your factoring agreement. However, if your industry has a high-risk reputation or if your clients have less than perfect credit, you may have to pay a bit more for your cash.
If your clients do in fact have less than perfect credit or somewhat questionable bill paying histories, you may opt for a non-recourse fee. This fee protects you in case your invoice customers do default on their obligations and end up costing the factor money or forcing it to use other tactics to collect on the bills.
This fee relieves you from the responsibility of having to pay for those invoices in case your customers default. The factor will not come after you or your business and demand payment for those totals if you pay this non-recourse fee.
Even with these fees, factoring ends up being less costly than a traditional bank or credit union small business loan. Banks charge rates that are sometimes based on your personal or business credit and could end up costing you way more than you can afford. Factoring is based on your invoices, as well as the credit worthiness of your clients. This option often proves to be more affordable, as well as faster and more convenient, for business owners like you who need money today.