There are several different costs that should be considered before selecting the best accounts receivable factoring service. Knowing the costs and understanding the fees associated with the service is very important for your business. A factor with the lowest receivable factoring costs and the top level of service is a real asset to your company, but it is important to compare your options.
When choosing a factor or using a factoring service, remember, it is not the creditworthiness of your business that is considered. Instead, it is the creditworthiness of your customers. Additionally, the factor will look at the age of the invoices, the volume or amount to be factored and the specific risks associated with factoring in a particular industry.
The most important issue to consider with receivable factoring costs is what is known as the discount rate. This is the rate the factor charges for the service, and it can range from a low of one percent to a high of five or more percent. The riskier the industry, the higher the percentage will be.
Additionally, if the customer has a low credit rating or history of slow payment, or if you are only factoring invoices from one or two accounts, the rate will typically be higher. This all relates to the risk involved for the factor.
Tips for Lower Discount Rates
Working with your factor can help reduce the discount rate you are offered. It is possible to negotiate receivable factoring costs, particularly if you are already a customer with the factor. Other ways to help reduce the rate include:
- Include larger and reliable accounts with the invoices you factor
- Try to avoid factoring just older invoices that are riskier or will require more factor time to obtain payment
- Look for factors that provide discounts for customers paying in advance of the terms
- Verify and review all additional costs that may be over and above the discount rate
There are factors that offer no additional costs or fees. This will ensure that you are never surprised by hidden fees that can end up costing you money.