Most people use a simple approach when comparing proposals from competing factoring companies: they make the decision based on who offers the lowest rate and the lowest application fee. Unfortunately, this approach usually leads to making a wrong choice. For starters, you should look for the proposal that offers the lowest total cost per dollar – not just the lowest rate. “Lowest rate” does not always equal “lowest cost.” But the bigger problem is that factoring companies structure their proposals differently – making it very difficult to do an “apples-to-apples” comparison.
Let’s first look at the common parts of a factoring proposal.
- The advance: the initial amount that the factor will give you for your invoice
- The discount: the fee – or rate – that the factor charges you
- Ancillary costs: additional expenses that the factor may charge
- Application and due diligence
- A 70% advance at a cost of 3% per 30 days
- An 80% advance at a cost of 3% per 30 days
- An 80% advance at a cost of 1.15% per 15 days
- An 80% advance at a cost of 3% per 30 days
- A 70% advance at 3.00% per 30 days
- An 80% advance at 3.43% per 30 days
Advance Rate | Factoring Rate | Cost per Dollar | |
Option 1 | 70% | 3.00% | $0.0429 |
Option 2 | 80% | 3.43% | $0.0429 |
Here’s a quick math lesson: remember that 80% is entered as 0.8 in your calculator and 3.43% is entered as 0.0343. Divide 0.0343 by 0.8 and you get the cost (in cents) per dollar. This takes us to our first step in evaluating a factoring proposal.
Step 1: Ask the factoring companies to submit their rates using the same format
You will have to ask the factors to submit their rates and advances using the same format so that you can make a meaningful comparison. For example, if you want your pricing on 30-day increments (as in 3% per 30 days), then you should ask each factor to submit the pricing using 30-day increments.
Step 2: Create a table and compare costs per dollar
The next step is to create a table, ideally a spreadsheet, that compares the cost per dollar of each proposal. The following table is an example of a spreadsheet that evaluates multiple proposals, all of which charge a 30-day rate.
Let’s look at the table. Which one offers the best deal? It depends, if you can live with a 75% advance, company B offers the cheapest money. If not, then company D may be a great deal because it offers a higher advance than the others but is cheaper than companies A and C. Using this table, you can make an educated and intelligent decision regarding who offers the lowest total cost per dollar.
Step 3: Compare all the extra costs
You can use a process similar to the one used in step 2 and list all the extra costs that each company charges. Add that to the information you already have in order to decide which factoring company offers the best deal.
Step 4: Cost is not everything
Selecting a provider based on cost alone can lead you to a wrong choice. There are other variables, outside of the proposal, that you should consider. Here is some information on selecting the best factoring company.
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We can provide factoring lines with high advances at low rates. For more information, get an online factoring quote or call (877) 300 3258.
Disclaimer: This post is for informational purposes only and does not provide legal or financial advice. Numbers and calculations are not guaranteed to be accurate or representative.