What You Need to Know About Invoice Factoring Rates

Invoice factoring is a type of financing available to business owners that are in B2B or B2G industries. With different terminology and a handful of things to consider, such as invoice factoring rates, fees, and advance rates, invoice factoring may be a little bit challenging to understand.

However, if you’re considering invoice factoring for your business, it’s important to understand the rates and fees. This ensures that you’re working with the best invoice factoring company for your business. Here are some points you might want to ask potential Factors about invoice factoring rates:

1.    How Factoring Advance Rates Work

People are often confused by the billing process of invoice factoring. Most people assume that the term ‘factoring interest rates’ is equivalent to the traditional APR’s, however, this isn’t the case. With invoice factoring the percentage refers to a discount, or the amount deducted from your business’ invoices as payments to the factor. For example, if your invoice is for $30,000 and the factoring company provides a 90% advance rate, the factoring company will give you $27,000 within 24 hours of invoicing. With invoice factoring, your business won’t have to wait 30-60 days to be paid. When the invoice is paid, the factoring company will collect a small fee and pass along the remaining balance.

2.    Average Invoice Factoring Rates

Factoring companies consider multiple aspects when determining their rates. The best rates are usually associated with companies that have a diversified group of high credit quality clients. In fact, some even pay as low as .5% per 30 days. Keep in mind that factoring companies consider the customer’s credit history, the debtors credit history, and the industry that you’re in.

3.    Fees for Invoice Factoring

Factoring companies require their customers to pay servicing fees. Companies usually deduct it from the cash that is advanced to you. Aside from the fee, factors will also withhold a portion of the invoice to serve as added insurance. Once your factoring company receives the full payment from your customer, they will wire the ‘insurance money’ to you.

4.    Different Fees For Different Clients

Factoring companies purchase invoices at a discount, so that business owners can get paid now, rather than waiting 30-90 dats. They will check the credit history of each customer before they approve of the transaction. The fees you pay the Factors will depend on your customers’ risk. Similarly, banks charge higher interest rates for applicants without an impressive credit score. The higher the risk, the higher the fees.

5.    Other Determinants Affecting the Cost for Invoice Factoring

Factors usually look at the following:

·         The terms of the invoices

·         The average dollar amount per invoice

·         The number of invoices being factor

·         The business industry

·         Days sales outstanding (DSO)

Since most factoring rates vary drastically depending on companies and invoices, it’s important to understand how the billing works in invoice factoring. Most importantly, make sure to choose a lender that puts your business in the best position to succeed.

If you want to know more about invoice factoring rates, you can contact SMB Compass for government contract factoring. We help small business like yours to get the funding and advice you rightly deserve. Don’t hesitate to give us a call at (888) 853-8922 or email us at info@smbcompass.com.