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Some factors will have other requirements for your business, such as a minimum credit score or minimum time in business, but these requirements are usually far less stringent than other lenders. Comparing the qualification requirements of the leading invoice factoring companies can help you decide which factoring company is best for your business. BlueVine offers to fund small business owners with a minimum credit score of The primary cost associated with factoring financing is the discount rate, which is sometimes referred to as the factor rate.
Invoice factoring rates generally range from 0. Additionally, factoring companies may charge additional fees, such as origination fees or minimum factoring fees. In addition to the discount rate charged on your factored invoices, there are other fees that you may encounter when using business factoring financing. Some factoring companies may charge you origination fees, services fees, collection fees, or an assortment of other fees.
Any additional fees that may be charged by the factor should be stated in your factoring agreement. Carefully read through the agreement to make sure that you understand what the fees are and when they apply. If you are applying with multiple factors to see which one will offer you the best deal, make sure to compare the fees that each charges as well as the discount rate.
Review your contract to determine what fees you may be charged and under what circumstances they will be incurred. If comparing multiple factoring companies, compare not only the advance and discount rates, but also the fees that each factor charges. The discount rate ranges from 0. With short-term borrowing, like invoice factoring, the total cost of capital can be a more important measure than the APR.
The total cost of capital is the total amount you will repay on each factored invoice.
Accounts Receivable Factoring
Comparing the effective APR of a 0. Despite the higher APR, the short repayment period equates to a relatively small cost of capital. There are a number of aspects to consider when you are selecting a provider for factoring financing.
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You need to determine the level of customer interaction you are comfortable with the factor having with your customers, as well as how quickly you need funding, whether you want recourse or non-recourse financing, and whether you want spot factoring or contract factoring; all of these will impact the factoring company you choose. One aspect of invoice factoring that intimidates a lot of businesses is the level of contact between the factor and your customers. This worry stems from the fact that your customer will make payments to the factor instead of directly to you.
In reality, some factors will want direct communication with your customer to verify invoices, verify the assignment of the invoice, and make payment arrangements. However, this is more common in industries where factoring is more prevalent and preserving customer relationships is a top priority for the factor. Some factors create an arrangement where the factor has far less and in some cases, zero direct communication with your customer.
Your customers are notified of the new account information for payment, and if the factor contacts your customer, they simply present themselves as your billing department. Another important consideration is how quickly you can receive funding, and this may matter to you more than anything else if you need cash to make payroll or buy something essential for your business.
With factoring financing, you can generally qualify within two to seven days and be funded in one to three business days after that. The exact funding speed will vary by factor. One of the most important concepts to understand when considering invoice factoring is recourse factoring versus non-recourse factoring.
Recourse factoring can become problematic if you have already spent the money you received from the factor. This is why you should only factor invoices to customers who reliably pay on time. Fees can continue to accrue until the factor is paid, often creating a new cash flow problem. Some firms advertise non-recourse factoring, but then they list several reasons why an invoice can be exempt from no recourse.
Other factors will offer partial recourse agreements. Spot factoring allows you to sell and assign individual invoices to a factor. While this may seem ideal for your business, many invoice factoring companies prefer not to factor in this way.
Contract factoring is far more common than spot factoring, and is the preferred method of factoring for most business factoring providers. Factoring is an area in which industry familiarity matters. The industry you and your customers are in can affect your terms and cost. Some factors specialize in providing financing to specific industries. Do your research and find a factor that understands the needs and norms of your industry.
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Conversely, the factoring company may have direct contact with your customers, selling your invoices relinquishes a level of control, and factoring can be expensive. Invoice factoring is a great financing solution for businesses with B2B and B2G invoices due within 90 days. However, it may not be the right solution for every business. The most natural alternative to invoice factoring is invoice financing.
Other potential alternatives include a small business line of credit and a small business credit card. As an alternative to invoice factoring, a small business line of credit LOC allows you to make advances against a pre-established credit limit. An advantage to this is you only pay interest on the amount advanced. Some of the best small business lines of credit can even provide you funding in as little as one to two days.
A final alternative to invoice factoring is a small business credit card , which is another short-term financing option popular among small businesses.
RSA Factoring Challenge - Wikipedia
A business credit card is a good option for businesses that are very small, want to manage employee expenses, or earn rewards. Some of the best small business credit cards may offer rewards that could truly benefit your business. Your rate should never be a total surprise. Remember that with factoring you are entering a major contract.
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A bad decision can literally cost you your business. Set up a call today. Learn more about the liquid capital difference. Helping business grow for 20 years throughout Canada and United States. Final Thoughts.