Adjustments for "turn" and volume:
Factoring companies may adjust the factoring rate up or down based on how quickly the invoices are paid, or "turn." This is because the longer the invoice remains unpaid, the more it costs the factoring company in interest, staff, and potential losses.
The rate might also be adjusted for the total dollar amount you factor, usually on a monthly basis. The more you factor, the more likely the factoring company will reduce your rate as a result of trust, efficiency, and lower risk.
These adjustments should be clearly stated in the security agreement. In many cases, the adjustments can be significant, so the client should study the agreement and be diligent to take advantage of the adjustments whenever it makes sense to do so.
Effect of reserves:
Many factoring transactions are done with reserves, meaning the factoring company holds back a percentage of the invoice until after it gets paid by the end customer. In general, the greater the reserve, the lower the factoring rate, since the factoring company is advancing fewer funds and is taking on a lower risk. If you''re looking to reduce your factoring rate and can manage a lower cash flow, ask your factoring company for a higher reserve and a lower rate.
Effect of term agreements:
Factoring agreements can vary from "no term" to two years and more. As a rule, the longer the agreement, the lower the factoring rate. To experience factoring before committing for the long haul, request a short-term agreement, then lengthen it after you''re convinced that factoring works for you. In most cases, keep in mind that term agreements usually require early termination fees.
Method of payment fees (ACH, wire transfer, etc.):
You can usually choose your method of payment. Checks are generally prepared without fees. ACH and wire transfers can cost a bit more but provide quick turnaround.
Added fees:
This is where you must be extremely diligent to avoid turning a productive tool into an expensive burden. Factoring companies can be very creative in managing income by reducing the factoring rate while adding all sorts of other fees. Be careful to ask about them and scour the security agreement before signing. Here are some of the more common fees that many companies charge (Riviera Finance prefers to quote all-inclusive fees with no add-ons):
- Postage and handling: per-invoice fees can include copying, mailing, filing, etc.
- Application fees (one-time)
- Setup fees (one-time)
- Error fees: for client and/or end-customer errors
- Credit checking fees for credit requests
- Chargebacks for invalid invoices
- Attorneys fees
- Default fees
There are many pricing elements and variables available in invoice factoring. Get ahead of the game and structure a deal that works for you.
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