Factoring plans often include minimum financing requirements. Committing to a minimum funding volume can help you get better factoring rates. However, it can also hurt your company if your minimums are not managed correctly. Most small and growing companies should consider factoring plans with no minimums, at least initially. From this article, you will learn:
- What is invoice factoring?
- What is a factoring minimum?
- What is a no-minimum plan?
- How much do they cost?
- Advantages and disadvantages of using minimums
- Minimums can be expensive
- Which option works best?
1. What is invoice factoring?
Factoring allows you to finance slow-paying invoices from commercial clients that pay on net-30 to net-60-day terms. This funding eliminates the wait for client payments and provides immediate funds for your company. It’s a tool that many small and growing businesses use to improve their cash flow.
Plans usually finance your invoice in two installments. The first installment is called the advance and is deposited into your account when you finance the invoice. Advances usually go from 80% to 90% of the invoice, depending on your industry.
The second installment is deposited into your account once your end customers pay the invoice. This installment settles the transaction and covers the remaining funds, less the factor’s fees. For more details, learn more about factoring and how it works.
2. What is a factoring minimum? Why do some companies ask for it?
A “factoring minimum” is a commitment from your company where it agrees to finance a minimum gross invoice volume. For example, your company could agree to factor a minimum of $50,000 or $100,000 in invoices every month. Minimums can also be set quarterly.
Using minimums is similar to getting a volume discount when buying goods from a supplier. The factoring company gives you a lower rate in exchange for a steady volume of invoices. These savings drop straight to your bottom line.
Factoring companies ask for minimums for two reasons. In some cases, factors prefer to work with clients with a certain revenue size. The minimum helps ensure that they only sign up companies able to meet the criteria. Alternatively, some factoring companies use minimums as a negotiating enticement to increase factoring volumes.
3. What is a “no-minimum” plan?
A no-minimum factoring plan allows you to finance any volume of invoices at any time. These plans give you the option to finance only what you need when you need it. You are not required to use the line at any specific time or for any particular amount.
Keep in mind that many no-minimum plans still require that individual invoices be of a certain size. This detail is important, and the reason for this requirement is purely operational. Factoring plans manage invoices individually. Tracking and settling a large volume of small invoices is cost-prohibitive.
4. How much does a no minimum plan cost?
General factoring rates usually go from 1.15% to 3.50% per 30 days. They can be pro-rated to account for different time periods. The financing rate is determined by your company’s volume, invoice quality, and risk parameters.
Plans with no minimums can be slightly more expensive than comparable plans with minimums. The difference in the rate can go from 0.25% to 0.50%, depending on the circumstances. Learn more about the cost of invoice factoring.
5. Advantages and Disadvantages
Having a plan with minimums is not necessarily bad. Actually, factoring minimums are a great option for stable companies with solid revenues and predictable growth. Minimums are simply a business decision with pros and cons that must be balanced.
The main advantage of having no minimums is that you get complete flexibility. You do not commit to factor any amount at any time. You only factor what you need when you need it. This arrangement is ideal for startups or companies with small and unpredictable revenues. The advantage comes at a cost, through slightly higher fees.
Agreeing to minimums provides you with a lower factoring rate. However, this agreement comes with a commitment on your company’s part to finance a certain volume regularly. Suppose you factor less than the minimum required volume. In that case, you will be charged a fee to make up for the difference between what you actually factored and the committed minimum.
6. Minimums can be expensive
Having a factoring contract with minimums can be expensive if it’s not managed correctly. The biggest drawback of having minimums is that you could end up paying for financing you didn’t use or need. Here are the two scenarios where that occurs.
a) You don’t meet your minimum
Failing to meet your minimums requirements will increase your financing costs. Your company paid the minimum fee but factored a smaller volume than required. Consequently, cost per factored dollar increases. This could make it more expensive than a plan with no minimums.
b) You finance more than what you need to
A company’s financing needs usually change as time goes by. It is possible that your financing needs could decrease. This is common once companies build a cash reserve. If this happens, you would still need to factor the minimum amount even though you don’t need as much financing. Consequently, you end up paying for financing you didn’t need or want.
7. Which option works best?
Which plan works best for you depends on your circumstances and the specific minimums you negotiate. If your company is small, has uncertain or uneven revenues, or has no track record, a plan with no minimums works best. Companies with a track record should consider forecasting revenues and estimating a minimum that is comfortable for them. Agree only to this minimum amount and never agree to a minimum amount you are not comfortable with.
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We are a leading provider of factoring and can provide plans without minimums. For more information, fill out this form or call us toll-free at (877) 300 3258.