Accounts receivable factoring is a great way to provide your company with the capital flow that it needs to run efficiently. However, as with any kind of lending, it is important that you completely understand the cost of factoring.
With financing comes fees, that isn’t new, but what kinds of things are used in the calculation of the factoring rates? Although it depends on the factoring company, here are a few that are taken into consideration by most factoring companies:
Although factoring fees do vary from company to company (the average fees landing somewhere between one and five percent), the best indicator of what your rate will be is volume. Companies that bring in higher monthly volume tend to have lower rates and vice versa. However, it is important that you reach out to AC financing companies to get a legitimate estimate.
Advance rates are the reason you are looking into factoring. When your company factors invoices, you will receive a large percentage of the invoice up front from the factoring company and the remainder (minus the factoring fee) will be paid once your customer pays the invoice. This advance is what allows your company to have the cash flow that it needs.
These advance rates vary greatly based on the industry of your company. Industries that are riskier and more challenging to fund will have lower advance rates while advances for low-risk industries are high. It is important that you reach out to potential factoring companies to get an estimate.
Invoice financing costs don’t just provide you with working capital. Once you begin factoring, you will realize that these companies do so much more.
As you begin to factor, it will soon become clear that factoring companies will extend into administrative support for no additional cost. These companies offer critical functions such as background and credit checks on potential debtors and make collection calls to ensure that you get paid. Most factors will also provide you with 24-hour access to online reports to ensure that you are on top of your finances.
Factor companies are not providing you with a loan, but are instead purchasing your receivables with cash. That way you don’t have to worry about adding liabilities to your balance sheet. What this ultimately leads to is a reduction in balance sheet debt and a lower debt to equity ratio.
Accounts Receivable financing will provide you with the cash flow you need to ensure that your day-to-day operations can function without the stress of missing invoice payments. The best part – it is still your money! Without the worry of how you are going to track down your debtors to get you the money they owe you, your business will have the opportunity to expand and operate at maximum capacity.
Scale Funding is an invoice factoring company serving businesses across the United States. For more information on factoring, call (800) 707-4845 for a free, no-obligation consultation and quote.