Finding a company that offers reasonable factoring rates can be difficult. A number of companies advertise seemingly cheap factoring rates. Actually, some companies do offer incredible plans at affordable rates. However, this is not always the case. Some plans appear cheap at first glance. After careful review, however, you realize that their cost is higher than you initially thought.
This article helps you understand how rates work and how to determine if the rates are really as cheap as they appear.
Understanding factoring costs
Unfortunately, a “1% factoring rate” offer does not give you enough information to determine the cost of the program. The cost of a factoring program is usually determined by three things:
- The factoring rate
- The length of the factoring period
- The advance
Knowing only one of these items does not help you understand the actual cost of a plan. To learn the cost of a factoring plan, you need all three items. For example, if a factor offers “1.15% per 30 days for an 85% advance,” you know how much money you are getting, how much you’ll be paying for it, and the length of the factoring period. This information allows you to determine the true cost of a factoring program. Keep this idea in mind when you are reviewing factoring companies, since many factors promote their rates only.
Resource: The True Cost of Factoring
Ask yourself, “Does the factoring rate make sense?”
Even if you get all three numbers, you still need to ask yourself if they actually make sense. Basically, if they appear too good to be true, most likely they are. In this case, it’s likely that additional fees or plan details have not been disclosed yet.
For example, some rates can appear to be cheaper than a home mortgage rate. Keep in mind that mortgages are secured by property and usually have a federal government guarantee. A well-underwritten mortgage is considered very safe by most experts. How can the cost of factoring an invoice be cheaper than that? This question can be an indicator that you don’t have all the facts yet.
Resource: How to Get the Best Factoring Rates
The details are in the factoring contract
The only way to truly understand the cost of a factoring program is to read – and understand – the factoring contract. The contract outlines all important details, including information on the factoring rates, advances, and time frames. But the contract also includes details on extra fees that may have not been mentioned in the initial proposal. These extra costs are important.
Some additional fees include:
- Invoice processing fees
- Mailing fees
- Lockbox fees
- Credit reviews
- Overdue fees, and so on
By the way, having these fees is not necessarily bad. Many reputable companies use them. However, these fees can add up. Therefore, consider all fees when comparing factoring proposals.
Resource: Learn more about factoring costs.
Working with cheap factoring companies
Many factoring companies have found ways to reduce costs and pass those savings to their clients. However, a factoring relationship is extremely important to the success of your business. Therefore, you need to do some legwork to ensure you choose the best factoring company for your business. Know what you are buying and how much it costs.
We suggest that you compare factoring companies and thoroughly understand your contracts – and costs – before signing.
Get more information
We can provide affordable factoring financing. For more information, get an online quote or call us at (877) 300 3258.