Understanding Factoring Fees
Fee structures can be complex, so be sure to thoroughly understand the details of the factoring company’s proposal. Fees for invoice factoring can vary throughout the industry but they are all dependent upon:
- Financial strength of your customer
- Your monthly volumes
- Duration of your contract with the factor
- Payment cycle of your receivables
Some companies will impress you with an offer of an initial fee less than 1%. Be sure you verify how long your proposal fee is in effect. If your fee is only good for seven days, you may end up paying more than 4% by the time your customer pays.
A very typical agreement is a stepped fee. Depending on when your customer pays their invoice, there is a set fee if they pay in less than 30 days and a larger fee if they pay past 30 days. (Check your contract details for the number of days.)
A flat rate fee program (ie. 3% to 60 days) can make things much easier for you, but you might miss out on some savings if your biggest customers pay in shorter times.
Ultimately know your aging report. Know the breaking point of when most of your customers will pay, and see if your fees can can structured toward that timeline.