Factoring Costs
First used in the United States, factoring has a long history of offering a quick solution to many firm’s cash flow problems. Selling an invoice to an outside entity might not sound the best way to do business, especially considering some of the discounts requested by factoring companies.
Indeed, many accountants flinch at the thought of increasing their company’s costs further by factoring. However, what exactly are the Factoring Costs? In general, there are two main factors which affect the size of the Factoring Costs; the size of the invoice amount and the number of days until the customer is required to pay.
In addition, factoring companies can also utilise other methods in order to work out their discounts. This simplest method is flat-rate pricing, which is independent of the time until the invoice is due. Whether 15 days or 90 days, the factoring firm will charge the seller the same fee.
However, the same flat-rate does not apply to all industries. For example, the textile industry is seen as higher-risk and often, factoring companies will only offer a lower up-front payment, in addition to requiring a higher percentage discount.
Additionally, another factor affecting Factoring Costs is the reliability of the seller’s customers. Notoriously late payers are likely to see higher discounts demanded by factoring companies. Sellers should also try to minimise the number of smaller invoices requiring factoring. This essentially reduces the factoring companies workload and increases the seller’s chances of a better discount.