Understanding the Fees and Charges Associated with Invoice Factoring
These days, a lot of businesses prefer invoice factoring over bank financing. This is because of the lower fees associated with factoring. But, this doesn’t mean factoring doesn’t have its own charges and fees. As a matter of fact, you may have to pay more to get your invoice factored if you don’t read your contract carefully. Read on to understand the fees and charges associated with invoice factoring.
Kinds of Fees and Charges
The fees involved in invoice factoring transactions include the following:
- Transaction fees or discount rate- The discount rate is the fee a factoring company charges to provide the factoring service. This can range from 2% to over 10%, depending on the company and the kind of contract you are getting yourself into. Thus, if you are looking to factor a big amount of invoices, the transaction fee involved may also be higher.
- One-time account setup fee. Although this fee can be applicable only during your first transaction with the company, it could run up to $2,000.
- Non-recourse factoring fee. This is applicable to factoring agreements which include a non-recourse clause. Thus, the factoring company will not hold you liable in case your client doesn’t pay their invoice or defaults.
What Impacts Invoice Factoring Fees
Often, factoring charges are based on many factors such as your industry and your clients’ dependability. For instance, if your business operates in a field where there is higher default risk, the factoring fees can be higher.
Also, your clients’ credit history matters in determining the factoring fee. The majority of factoring companies require that they need to have a good history of paying their invoices on time. But, factoring companies may accept less-than-perfect clients although they tend to charge you higher transaction fees. This will cover the possibility of a default.
Overall, factoring fees are low compared to the fees associated with small business loans. But because factoring companies differ in their charges and fees, you need to look for one with terms and policies that work for your situation. While invoice factoring can be a dependable financing option, it can be costly for you when you don’t know beforehand what exactly you are looking for. Especially if you are new to factoring, try to get as much information as you can before you jump into the factoring wagon. There are experts who can enlighten you on this matter so don’t hesitate to get some help.
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