The Hidden Costs of Invoice Factoring

The hidden costs of invoice factoring include commonly overlooked costs and fees that could significantly increase the cost of factoring invoices, decreasing its benefit to your organization.

Eliminate the Hidden Costs of Invoice Factoring

When comparing the invoice factoring proposals of US factoring companies, remember to look for additional costs or add-on fees not just at the discount rate you are being offered; these can be the hidden costs of invoice factoring. They may seem small but when you do the math you can clearly see that they quickly eat into your business’ profits.

B2B organizations (companies that sell business-to-business, as opposed to direct to consumer) that invoice their customers using accounts receivable invoices can turn those invoices into immediate working capital if they factor – or sell – the invoices to a third party factoring company. Organizations that factor invoices usually do so because it’s better for them to get access to that capital right away, instead of waiting weeks or months for their customers to remit payment.

Invoice factoring (also commonly referred to as receivables financing or receivables factoring) is simply the process of selling your invoices to a factoring company at a discount (called a factoring fee). For instance, we help our clients have the ability to factor invoices with fees as low as 1%. When they factor an invoice, they get a same day advance on the amount of the invoice which could be as much as 98% of the invoice amount. Any remaining amount (the invoice amount less advance and factoring fee) is held in reserve. After the account debtor (the customer responsible to pay the invoice) remits full payment, the reserve is also returned to our client.

Though it may sound confusing, the invoice factoring process really comes down to three parties, and three steps:

The Client – or Factoring Client – a business that invoices their customers and chooses to factor the invoice instead of waiting for customers to pay

The Factor – or Factoring Company – the financing company that factors (or buys) the invoice from the factoring client

The Debtor – the client’s customer, the one responsible to pay the invoice

Add-On Fees, Intro Rates and Other Hidden Costs of Invoice Factoring

If your intention is to utilize invoice factoring to speed up cash flow by unlocking working capital tied down in customer invoices, you should compare the advance amounts and factoring fees offered by factoring companies (or Factors). In addition, you should never “sign on the dotted line” until you know exactly how the program works, all of the fees that may apply, and how factoring your invoices could impact your profitability. In other words, check for hidden costs of invoice factoring programs that could jack up the real cost of financing.

Transparency is one of our guiding values. We don’t want our clients negatively impacted by any of the hidden costs of invoice factoring. We can help you evaluate your current agreement or provide you with an invoice factoring proposal where the factoring fee is your “all-in” cost, and hidden or add-on costs won’t reduce the financial benefits of factoring for your company.

Hidden Costs of Invoice Factoring that Could Negatively Impact Revenue

1. Long Term Contracts

Some factoring companies require clients to sign long-term contracts that range from 6, 12, and at time 24 months. If the client does not adhere to the contract’s conditions or needs to be released from the contract before the terms are up, significant penalties could be assessed.

2. Monthly Minimums or Other Minimum Factoring Requirements

Some factoring companies require that you commit to factoring a minimum number or dollar amount of invoices every month (or every quarter, etc.) and if you fail to meet these minimums a penalty fee may be assessed.

3. Add-On or Administration Fees

Though it seems like administrative services should be part of the service provided, some invoice factoring companies tack on extra fees for the administrative tasks that are part of the invoice factoring process. We don’t charge extra fees to process your paperwork. Working with us to find the right factoring agreement doesn’t cost you more, but it can help you find the program best-suited to the financial needs of your organization.

Some of the other hidden fees of invoice factoring that might be assigned include things like:

• Application fees
• Proposal fees
• Due diligence fees
• Credit check fees
• Notification fees
• Schedule processing fees
• Invoice processing fees
• Wire transfer fees
• Funding fees

We don’t charge for any application, due diligence, account set up or other administrative tasks; we view them as part of our service in helping to get your business approved to factor invoices. We can help you find factoring companies that work the same way – without charging administration and add-on fees that impact your company financially.

4. Introductory Rates, Fees or Other Conditions

Some factoring companies may offer a very low rate to new clients; however, down the line, lower advance rates or higher factoring fees could quickly wipe out any savings represented during the introductory period.  As our client, you will know what your advance rate and factoring fees will be from the outset, so you can make financial decisions in the best interests of your organization.

5. Lost Customers

When you factor invoices, your customers are also impacted by the factoring company you choose to do business with. A Factor that engages in strong-arm collections tactics or pressures your customers to pay more quickly could result in lost customers for your business. We want to help you grow your business, and we can help you get factoring services that provide the professional, courteous customer service you’re looking for in a financial partner.

6. Recourse Factoring Buy-Back Stipulations

Most factoring companies factor invoices with recourse. This usually means that you can be required to buy back an invoice at its full face value if your customer does not pay within a given period of time. We can help you find non-recourse factoring services that don’t require you to buy back invoices except in the case where charges are disputed by the customer (e.g., a bill was sent in error or a customer never received a shipment).

Non-recourse factoring also protects your organization from financial risk from bad debt. When a non-recourse factoring company factors an invoice, and your customer can’t pay due to insolvency, the factoring company absorbs the loss. Working with a non-recourse factoring company reduces – or even eliminates – your organization’s risk from bad debt. Find out more about the differences between recourse and non-recourse factoring here.

Find Out More About Invoice Factoring as a Business Financing Alternative

If you would like to speak us or get a free, no-obligation quote, feel free to contact us or complete the factoring quick quote form below.

Within 24-48 hours, you can have answers to your questions to help you decide whether invoice factoring is an appropriate working capital financing option for your business. And you could go from approval to your first funding in hours.