It is a wise choice for many companies to turn to factoring receivables as a simple, effective and efficient way to address short-term cash flow gaps between invoicing and customer payment.
However, it is critical to spend some time in comparing factoring receivable rates. Differences in these rates, including hidden fees and costs, can add to the amount paid to the factor, which reduces the amount you will receive for your invoices.
Check Rates for your Volume
You may see factors offer terrific factoring receivable rates. However, what they are advertising are the rates for their top customers. These are the rates provided to the large companies that are putting through hundreds of thousands of dollars in accounts receivable per week, month or quarter.
Additionally, these will also be the rates for the customers that have very low risk. Most smaller companies are dealing with other small to mid-sized companies that may be considered low-moderate to moderate risk.
Without clarifying the specific rate for your invoices in your industry, don’t go by the advertised rates. Often you will find the small print contains all the disclaimers about the quoted rates.
Hidden Costs
Some companies offer low factoring receivable rates but then tack on a lot of additional costs for their service. They may charge an application fee, a due diligence fee, and a termination fee. There can even be fees for phone calls or extra work required in following up with the customer to pay off an invoice.
Take the time to shop around and compare rates and costs based on your specific invoices. Don’t lock into a long-term relationship, particularly if minimum volumes are required, as this can end up costing your business in penalties to either maintain the working relationship or to get out of the agreement.
There are factors out there offering highly competitive rates, no additional fees, and no long-term contracts. These are the ideal option for a small to mid-sized business offering flexibility and services that are beneficial.
