Factoring invoices is an excellent way to free up working capital. However, not all invoice factoring companies are the same, as certain invoice factoring companies do operate under widely disparate terms and conditions.
Additionally, factoring companies have varying reputations. Therefore, before entering into an invoice factoring agreement, take a look at some critical considerations. Here are some things you should consider in a factoring company:
1. Types of Invoices A Business Factors
Certain factoring companies will not accept specific invoices. For example, invoices for advance payments or deposits may not be included. Invoices for annual support fees or subscriptions may also be a source of contention. To avoid unpleasant surprises, be candid with factoring companies regarding the nature of your bills.
2. Calculating the Factoring Rate
Factoring companies charge interest on advance payments. These interest rates range from 1.15% to 3.5% each month past due. When comparing factoring rates, it’s also necessary to factor in additional expenses. Certain businesses advertise low rates but demand additional fees.
3. The Percentage of Advance
The factoring company will advance you a percentage of each sales invoice. The balance is paid by the customer when the invoice is paid.
This advance ranges from 70% to 95%, depending on the industry and the history of your business. However, some factoring companies are more generous with their payouts than others. Therefore, while comparing factoring firms, compare this section of the agreements.
4. The Minimum Value
Certain factoring agreements stipulate a minimum monthly or quarterl