Are Factoring Rates That Important?

The first thing that most prospects want to know when they speak to a factoring company is the price of their services – the factoring rate. Many prospects focus on this aspect, and many make the decision based solely on rate.

Rate is not the only – nor most important – thing

Although rate is an important variable, it is not the only variable that you should look at – and it’s not always the most important one. The factoring industry is highly competitive, which means that the difference in price between different factoring offers is usually small. For example, consider these two factoring offers:

  • 2% for 30 days
  • 2.25% for 30 days

Most people would think that the first offer is substantially better. In reality, the difference amounts to only $250 per $100,000 factored per month. Here is what I mean:

  • $100,000 x 2% = $2,000
  • $100,000 x 2.25% = $2250
  • $2,000 – $2,250 = $250

Sure, for a company invoicing $100,000 per month on net-30 terms, this difference can amount to $3,000 per year ($250 x 12 = $3,000). However, if you consider that this company is making $1,200,000 per year ($100,000 x 12 = $1,200,000), $3,000 represents a very small amount. Evaluate your invoice factoring proposal and factoring company on the following variables that are equally as important as price:

  • Is the factoring company experienced in your industry? You want to partner with a company that knows, and has clients in, your industry.
  • Is your factoring company responsive? You want a company that responds to your requests and makes decisions quickly.
  • How does your factoring company treat your customers? You want a company that has a professional, soft touch with your customers.
  • How long has your factoring company been in business? You want to work with someone who has been in business for a while and has experience.
  • Do you have rapport with them?  You want to work with a company that is friendly and easy to work with. This quality is hard to measure but is very important.

Few prospects evaluate factoring companies on the above variables, but ignoring these variables can be a critical mistake. For example, partnering with a factoring company that does not know your industry can spell disaster. Likewise, partnering with an unresponsive company or one with whom you have bad rapport is also a recipe for failure.

To make a balanced decision that has the best chance of being the right one, evaluate all these variables, in addition to price. Otherwise, the wrong decision could cost your company dearly. For more information on this subject, please read “Comparing factoring proposals.”

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