As a business owner, understanding the cost of any financial decisions you make is important to your bottom line. When using a factoring company, carefully comparing and negotiating the receivable factoring costs can help decrease the costs of the factoring service.
Unlike a bank or a traditional financial institute, a factor will consider many different components before establishing a rate. This is based on several different variables and can change over time based on these issues. The most common include the creditworthiness of the companies invoiced, the specific industry, the volume of the invoices and the length of time of the terms.
Highly creditworthy customers and multiple invoices rather than one or two large invoices to higher risk customers will have a lower risk for the factor, resulting in better rates.
The Discount Rate
The discount rate is the fee the factor will charge, and it is the most important of the receivable factoring costs from the business perspective. Typically, most will range between 1 and 5% per thirty days with the rate going up as the time to pay extends.
Typically, the 1% discount rate will only apply to businesses factoring millions of dollars a month and invoicing only highly creditworthy customers. The industry risk will also be considered at this rate with the 5% usually offered in high-risk industries or to less creditworthy customers.
The higher volume of factoring across multiple customers will lower the discount rate as the factor has less risk to assume. Other considerations with regards to rate will include:
- Higher rates for longer term or older invoices
- Possibility of negotiating the discount rates every 10-15 days on creditworthy accounts
- Possible discount offered to your customers for early repayment of the invoice
Always talk to the factor and be prepared to negotiate the receivable factoring costs for favorable accounts that are of low risk to the factor.