An invoice factoring company can charge a fee, also called a discount rate, in exchange for the advance they provide your business, and are involved in collecting on your business outstanding invoices. Fees can run from 1% to 5% of your submitted accounts receivables value. In the majority of cases, the fees generally range from 3% to 5%. A number of different determinants help a factoring company decide upon a rate offered.
Certain elements can affect the fees and up-front percentages offered.They include:
Type of factoring
If you want the accounts receivable factoring company to assume all the risk for unpaid accounts receivable, also known as non-recourse factoring, you can expect to pay more for these types of factoring services, as they increase the factors risk considerably.
Type of billing
Discount rates will be higher for progressive factoring, as opposed to non-progressive factoring, because it requires more work for the factor.
Your clients
Factoring relies on both the ability of your clients to repay and their credit worthiness, so if you maintain accounts with clients that have an established repayment history and a good credit rating, you will generally receive a better discount rate and have more room for negotiation with your factor.
Your industry
Certain industries inherently carry more risk than others when it comes to collecting monies owed. If you run a business in a higher-risk industry, such as in the garment and textile industries, it is likely that your factor will require a higher discount rate, could possibly limit the amount of funding that you are eligible to receive up front.
Number of invoices
Each invoice you submit to a factor for an advance will increase their workload. By submitting fewer high-dollar invoices over a larger number of low-dollar invoices, you are decreasing the amount of work for the factor, which generates the possibility of negotiating a better discount rate if your factor does not automatically offer it.
Account setup costs
Some factoring services will charge an account setup fee to businesses who want to use their services. These fees can range from $500 to over $2,000, and are used to help cover the costs of a factors time and efforts in running credit reports, and validating your clients invoices and abilities to pay what they owe. Not all factors require setup fees, but this one-time charge is common in the industry.