There are many advantages of invoice factoring, but choosing a traditional or new-age factoring company can be difficult. Between long term contracts, vague terms, hidden fees and penalties, and minimum monthly funding amounts, a true factoring facility often leaves a lot to be desired. We hope you find this article helpful in choosing the right factoring company to best fit your needs. As always, don’t hesitate to reach out to us to review a factoring deal you have on the table. We’re happy to help!
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Transparency in Rates and Fees
Many factoring companies, unfortunately, don’t make it easy to determine their total fees. Often times invoice factoring companies will have an underwriting fee, a discount fee, an early termination fee, and a misdirected payment fee. Here is a quick breakdown of what those are:
Underwriting Fee – this usually goes toward the actual expenses involved in underwriting your deal, like a background check and UCC filing / release. Careful this is not egregious. It’s very customary to be charged an underwriting fee and factoring companies have every right to do it, but it cannot be outrageous. It should be simply to cover costs. Request specifically: a break down of what it costs to do 1) background checks, 2) debtor underwriting and 3) UCC filings / releases. Ask that they don’t charge you anything more than cost.
Discount Fee – this is a one-time fee, usually as a % of total invoices purchased, charged in the first month. You can probably negotiate to have this waived.
Early Termination Fee – if you terminate the contract too early, you may be charged a flat rate fee of $5000-$10,000. This would be above and beyond the buyout (the buyout is the total amount of your invoices that are now owed to the factoring company). Request specifically: a waiver of early termination fees if you are terminating the factoring relationship in exchange for a bank line of credit (or some other type of financing from an FDIC insured institution). If a factoring company pushes back on this request, they’re simply in it for themselves and don’t care about your long-term prosperity.
Misdirected Payment Fee – if your customers improperly pay you (on purpose or accident), then you will be charged a percentage of the invoice value that was inadvertently paid to you. The reason being is that the factoring company cannot prove whether or not the misdirected payment was done at your direction. Therefore, to avoid this fee, receive written assurance (via a UCC notification/acknowledgment letter provided to you by the factor) that payment will be directed to the factor.
Also ask your factor if they pro-rate the factoring fees in the first month of funding, or if they charge you a full month’s worth. For example, if your quoted factoring fee is 2%, it will be pro-rated on a daily basis. Meaning if you get funded mid-month, you will be charged 1% (for half a month). However, some factors charge the full 2% in the first month of funding, regardless of when the funds hit. This is pretty standard, however it should be conspicuously disclosed in the term sheet or the factoring company should call it to your attention.
Look for Flexible Terms
Let’s be realistic, factoring your invoices is a lot like staying in a hotel. You don’t do it all year around, only when you travel (or need to). Therefore, you should look for a term that is 6-12 months, or spot factoring (spot factoring is a one-off sales of your individual receivables, at your choosing). The problem with a long-term relationship is that factoring might not make sense for you in 8 months, for example. Your business could be cash-flow sufficient, so why factor your invoices? If you get yourself into a long-term contract, it’s important to have a scapegoat, so try to negotiate your way out of any early termination fees.
Choosing The Right Factoring Company
The most important thing is transparency. Factoring companies, much like you, are in the business of making money. So finding a deal with no fees is quite hard. But if the factoring company is honest, open and transparent from the outset about what they will charge you, then that is the most important. What you don’t want are hidden fees and surprises, so be sure to ask the right questions and understand the deal from the very beginning. Lastly, you want to enjoy who you’re working with. If they offer you a good deal but the factor gives you bad vibes (for whatever reason), move on. Go with your gut, make sure you like who you are working with – a factoring company should be viewed as a partner.
As mentioned, we are always here to help you review a deal or find you a better offer. Contact us any time to help you pick the right factoring partner.