Invoice factoring provides businesses with quick cash they can use to invest in expansion or cover expenses. However, business owners often wonder if it’s the most cost-effective way to obtain funding. Here’s a breakdown of the process, a comparison of recourse and non-recourse factoring, and a look at factoring fees.
The Invoice Factoring Process
Here’s how factoring puts cash in your pocket faster than traditional financing:
- When your business provides goods or services, you send an invoice for the amount due to both the customer and your factoring company.
- The factoring company pays you between 80 and 90 percent of the invoice amount.
- The factor collects the amount receivable from the customer, and your customer sends them the entire amount due.
- Once the customer pays, the factoring company sends you the remaining 10 to 20 percent, minus factoring fees.
Recourse vs. Non-Recourse Factoring
Business owners often wonder what happens when they choose factoring and a client doesn’t pay the money they owe. It depends on the type of factoring you choose.
Recourse means protection or right to collect. In factoring, it involves an understanding of whether your company must pay back receivables if the client doesn’t remit payment in full. With recourse factoring, your company is responsible for uncollected invoice amounts. Since factoring companies assume less risk, they charge less for their services.
Non-recourse factoring allows your business to sell invoices, and if customers pay late or don’t pay at all, the factor absorbs the loss. The risk to the invoice factoring company is higher, so the fees typically are as well. When deciding whether recourse or non-recourse factoring is best for your business, consider how the bulk of your customers regularly pay and how it will impact your company if you have to pay the factor for missing invoices.
Fees for Factoring
Most factoring companies structure fees based on the creditworthiness of your customers, the average invoice amount, whether transactions take place domestically or involve international accounts, and your normal turnover rate.
Flat factoring fees are a fixed percentage of each invoice amount. For example, a flat fee of three percent means if an invoice is for $1,000, the fee is always $30.
Tiered factoring fees change depending on how long the client takes to pay. It may be low for clients who pay quickly, but increases the longer the factoring company has to wait for payment.
If your business is considering factoring, weigh the benefits of improved cash flow against what you’ll pay in fees. Factoring allows many businesses to provide goods and services to international and slow-paying clients when otherwise the delay would be prohibitive.
Bay View Funding can lend up to $15 million with rates as low as 0.5 percent*. We typically advance between 70 and 90 percent of invoice value, and don’t deduct fees until your business receives the remainder. We’ve been helping businesses improve cash flow since 1985. Learn more about how we can partner with your business today.
*Rates subject to change.
