Six hidden costs of invoice factoring could make factoring invoices more expensive and less beneficial as a cash flow management tool.
6 Hidden Costs of Invoice Factoring Reduce Benefits and Drive Up Cost
When comparing the invoice factoring proposals of U.S. factoring companies, remember to look for additional costs and add-on fees in addition to the factoring fee that is being offered.
These fees and charges may seem small but when you do the math you can clearly see that they quickly eat into your business’ profits and jack up the real cost of invoice factoring.
1. 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.
Any add-on cost drives up the real cost of invoice factoring. Some of the other hidden fees factoring companies might tack on include things like:
- Application fees
- Proposal fees
- Due diligence fees
- Credit check fees
- Notification fees
- Schedule processing fees
- Invoice processing fees
We don’t charge any application, due diligence, credit check or account set up fees that drive up the cost of factoring. Nor do we assess extra fees to process paperwork, transfer funds or notify you of account actions. We view these types of tasks as intrinsic to the invoice factoring process, not as add-ons.
2. Long Term Contracts
Some factoring companies require clients to sign long-term contracts that might range from 6, 12, or even 24 months, and harbor strict renewal and notification clauses. If a client doesn’t adhere to the contract’s conditions or needs to be released from the contract before the terms are up, significant penalties are often assessed.
We don’t require clients to sign long-term factoring agreements, so they aren’t locked into an agreement that may no longer be right for their business. We believe the best factoring companies earn their clients’ continued patronage through professional customer service and outstanding performance, not long-term contracts with stiff penalty clauses for leaving.
3. Monthly Minimums or Other Minimum Factoring Requirements
Some factoring companies require clients to commit to factoring a minimum number or dollar amount of invoices every month or every quarter. If they fail to meet these minimums a penalty fee is assessed. Being locked in to factoring minimums may not be what is best for an organization. Factoring is a financing tool meant to help an organization grow more quickly, but mandated factoring isn’t always what’s best for a business. We don’t require clients to commit to factoring minimums. They have the freedom to factor only when it’s best for their business.
4. Introductory Rates, Fees or Other Conditions
Some factoring companies offer low introductory rates to new clients, then down the line they lower advance rates and raise factoring fees, quickly wiping out any savings enjoyed during the introductory period. In other cases, factoring companies offer what sounds like a low fee, but fine print reveals the fee is applied weekly or progressively, which then also costs the client more. We value transparency and simplicity. 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 an organization factors invoices, the relationships they have with their customers may also be impacted by the factoring company they chose to do business with. A factoring company that engages in strong-arm collections tactics or pressures customers to pay more quickly could result in lost customers for a business. We view factoring as a tool our clients can use to grow their business and we want clients to use our services for as long as it benefits their bottom line. This view to the long term means we extend a high level of professional, courteous customer service to our clients’ customers as well.
Another way we help improve cash flow without jeopardizing customer relationships is through non-notification factoring. With non-notification factoring, the customer may never know an company is utilizing invoice factoring because the process is white-labeled to the organization almost completely, providing a seamless customer experience.
6. Recourse Factoring Buy-Back Stipulations
Most U.S. factoring companies factor invoices with recourse. Organizations that factor with full-recourse may be required to buy back an invoice at its full face value if a customer does not pay within a given period of time, if the customer cannot pay due to insolvency or for any other reason.
We do offer full-recourse factoring, but we also offer non-recourse factoring services that help minimize the organization’s risk from bad debt. With non-recourse factoring, we assume the credit risk for the invoices factored by an organization, and (in most cases) absorb the loss if a customer is unable to pay.
Eliminate the Hidden Costs of Invoice Factoring
Transparency with our customers is one of our guiding values. We are proud to offer receivables financing that is free of the hidden costs of invoice factoring, including the add-on costs some other factoring companies use to produce additional revenues. Ideally, your factoring fee will be your “all in” cost of financing.
Since it is likely your intention to utilize invoice factoring to speed up the incoming cash flow from invoices currently on your books (and thus get that working capital back into your business more quickly) it stands to reason you should compare the advance amounts and factoring fees offered by factoring companies (or Factors). As an educated, astute shopper of these services, you should never sign on the dotted line until you know exactly how the program works, all the fees that may apply, and how factoring your invoices could impact your profitability.
If you have questions about your factoring contract, want a quote for comparison or would like to find out more about our services, request a quote. We will be happy to provide you with a factoring proposal which you can compare against your current agreement.