How to Apply for Invoice Factoring
How Much Does Invoice Factoring Cost?
Many business owners question how much the invoice factoring process costs. The truth is, it depends. There are a variety of factors that go into the approval process for an invoice factoring agreement, such as creditworthiness, the number of invoices a business will submit for financing and even the type of industry a business is in. However, there is typically a factoring fee of between 0.05% and 4% on average. Additionally, business owners may come across these fees along the way:
Monthly Minimum Fees
If a business produces less than ideal results after a credit check, factors may require businesses to commit to a minimum amount of invoicing submitted each month. If a business fails to meet the minimum, the factor can charge additional fees.
Many factoring companies charge businesses a fee to keep their accounts running and open. This type of fee usually occurs each month.
If a business owner signs a long-term contract and desires to terminate their invoice factoring agreement, there may be cancellation or termination fees. This typically will run a business a small percentage of their credit line.
Due Diligence Fees
Sometimes, a factor will check into the reliability of a business’ clients beyond face value (whether or not the client is a credit risk, if they have any liens against them, etc). Each time the factoring company performs this check, they may charge the business a due diligence fee. This fee typically ranges in cost from a few hundred dollars to several thousand.
Invoice Factoring: Advantages and Disadvantages
FAQs About Invoice Factoring
What does it mean to factor an invoice?
Factoring an invoice means selling it to a lender in return for a discounted advance. Then, the lender collects the unpaid invoice from your customers on your behalf.
Is invoice factoring a bank loan?
Invoice factoring is not a traditional bank or business loan. Factoring allows you to release untapped working capital from your accounts receivable to meet your immediate cash needs.
What is the difference between invoice factoring and invoice discounting?
Invoice factoring is when a business sells its invoices to a third party and then the factoring company controls the sales ledger and collects the debts. Invoice discounting allows you to draw money against your invoices, however, the business maintains control over the administration of your sales ledger.
What are the types of invoice factoring?
There are two main types of invoice factoring: recourse and non-recourse. Recourse factoring is the most common type of invoice factoring in the United States. Recourse factoring involves an agreement that if your customers do not pay the factor, the business owner is responsible for compensating the factor. With non-recourse factoring, the factor assumes all the risk and if the customer fails to pay, the business owner does not owe anything to the factor.