Accounts Receivable Factoring Cost
Factoring is usually not too expensive, but a business must understand the accounts receivable factoring cost involved with every transaction it undertakes to better plan and forecast its performance results.
Accounts receivable factoring companies don’t work for free. They charge a fee in exchange of fronting you the money you need and bearing the risk that your customer does not pay their outstanding liabilities.
Factoring involves cost components such as transaction fees and discount rates.
These vary by company, hence the important of selecting the right accounts receivable factoring company.
If you are factoring $500,000 every year, a difference of only 1% in the discount rate can mean $5,000 in added costs.
The discount rate is typically the fee you are charged on every transaction which ranges anywhere from 1% to 5%.
When the markets are down and credit is tight, factoring companies hike up their rates realizing that businesses need a place to go to in order to raise working capital and growth funding.
The Risk Involved?
Companies will either want to enter a with recourse or a without recourse accounts receivable factoring agreement with your business.
With recourse means that if your customers do not pay, you have to pay the factoring company.
No recourse is exactly what it sounds.
The more risk a company takes, the higher the fee they will charge you.
Who Your Clients Are?
Are your clients reliable people? Is their credit history solid? This depends highly on the type of business you are in, the area(s) where you operate, etc. The higher the risk profile of your customer is, the more the factoring company will charge you in interest rates.
What Business Are You In?
There are some businesses where collecting money from customers can be a big pain. For example, if you are into retail clothing, a business where there is no collateral to reposes and items devalue almost immediately upon purchase, there is a good chance you will pay a higher factoring fee.