Factoring plans often include minimum financing requirements. Although committing to a minimum funding volume can help you get better factoring rates, it can also hurt your company if not managed correctly. As a matter of fact, many small and growing companies should consider factoring plans with no minimums, at least initially.
From this article you will learn:
- What invoice factoring is
- What a factoring minimum is
- What a no-minimum plan is and how it works
- The advantages and disadvantages of using minimums
- Things to keep in mind if you agree to minimums
What is invoice factoring?
Factoring allows you to finance slow-paying invoices from commercial clients who often pay on net-30 to net-60 day terms. This funding eliminates the wait for client payments and provides immediate working capital for your company. It’s a tool that many small and growing businesses use to improve their cash flow. For more details, learn more about factoring and how it works.
What is a factoring minimum? Why do some companies ask for it?
A “factoring minimum” is a commitment from your company to finance a minimum gross invoice volume for a given period of time. For example, your company could agree to factor a minimum of $50,000 or $100,000 in invoices every month. Note that minimum agreements and terms vary and are negotiable.
If you agree to factor a minimum amount of invoices, the factoring company agrees to provide you with a lower factoring rate. Basically, you agree to a certain financing volume in exchange for a discounted rate.
Factoring companies ask for minimums for two reasons. In some cases, factors prefer to work with clients that have 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, by providing volume discount.
What is a “no-minimum” plan?
A no-minimum factoring plan allows you to finance any volume of invoices at any time. You are not required to use the line at any specific time or for any specific amount. This plan gives you the option to finance only what you need when you need it.
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.
As a result, companies with very small invoices (e.g., $50 or $100) may still have issues working with a no-minimum factoring plan. However, some companies can provide these services for small businesses.
Advantages and Disadvantages
Having a plan with minimums is not bad per se. Actually, they are great for stable companies that have solid revenues and are growing. Using minimums is simply a business decision that has pros and cons that must be balanced.
The main advantage of having no minimums is that you get ultimate flexibility. You have no commitment 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 whose revenues are small and unpredictable. The advantage comes at a cost, though. You pay higher factoring fees for this benefit, which lowers your profits.
Agreeing to minimums, on the other hand, provides you with a lower factoring rate. If your company can meet the financing commitment, it is a great way to keep costs down and keep more profits.
Things to keep in mind if you agree to minimums
If you agree to factoring minimums, the factoring company expects you to meet your commitment. If you factor less than the minimum required volume, you will be charged a fee to make up for the difference between what you actually factored and the committed minimum.
Therefore, enter into a factoring agreement that has minimums only if you are certain that you will be able to meet them. Otherwise, it could become more expensive than the alternative.
For more information about factoring for small businesses, read “How to Select a Small Business Factoring Company“.
Looking for no-minimum factoring?
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.