Before signing any formal agreements with the factor, be prepared to ask the following: That may or may not be a decision you have to make. For instance, would you be willing to sacrifice relationships with customers in order to get paid sooner? When it comes time to choose an invoice factor, consider what is most important to you. If your factor does a credit check on your customers as part of setting up a contract, they may pass on the cost. Your factor may pass on fees associated with either ACH or wire transfers-you can often get factor payments deposited directly in your bank account. In this case, the factor may charge an extra operating fee for the digital “lockbox.” When your clients pay their invoices through the factor, they may do it via an online interface. Similar to an unused line fee, if you fail to generate and pay a predefined minimum rate to your factor during the month, they may charge you a penalty. If you have a factoring facility-an amount of usable factoring per month or week-your factor may charge you for failing to use all of it. They may even charge you a flat fee for all late payments, whether they need to go through collections or not. If the factor is forced to collect money from a client who is late, they may charge you a penalty. If you have a contract with a factor, they may charge you each year to renew your account. When you start a relationship with a factoring company, you’ll often be charged to open an account. Before you sign up for factoring, find out whether you’ll be charged any of the following: In addition to the factor rate, factors may charge additional fees. (That’s $400, minus 3% monthly for two months.)Īll these fees will be spelled out in a factoring agreement, which you may be able to negotiate, depending on the vendor. ABC Factoring sends you $280, the rest of the money they owe you.Right away, ABC Factoring sends you $1,600.You factor the invoice with ABC Factoring at a rate of 3% monthly.This example doesn’t use a tiered system, and doesn’t take into account additional fees (discussed below). Here’s a step-by-step example using Greg. The longer your client takes to pay an invoice, the higher the factor rate.

The industry standard is 0.5–5% per month.Ī lot of factors have a tiered system. The factor rate (also called a discount rate) is a percentage of the invoice value, charged weekly or monthly. You’ll get the other 20%-minus the factor rate-once the client pays their invoice.

When you factor invoices, you can expect to receive about 80% of the value of your accounts receivable upfront. Here are the common rates and fees you expect a factor to charge. A line of credit is an ongoing source of capital you can draw from when needed. The onus is on the factor to collect the receivable and get paid.Īnd unlike a line of credit, it’s a one-time infusion of cash, directly related to invoices you agree to finance. How it differs from other financing optionsįactoring is not considered a small business loan, because there isn’t anything to pay back. And once Greg pays his invoice, the factor will have their money as well. The factoring company gives you $2,000, minus a few percent to cover their rates. Problem is, you need cash ASAP to buy a new leaf blower. You’ve just sent your client Greg an invoice for $2,000, payable in 60 days. Let’s say you run a landscaping business. Sometimes factoring companies will check out the creditworthiness of your clients, too-they want to make sure they’re not dealing with people who won’t pay their invoices. Generally, it takes two to seven days to qualify for invoice factoring, and another one to two days to receive payment from the factor. To factor an invoice, it must have a term of 30 to 90 days.

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