Factoring accounts receivables and invoice factoring are cash flow financing strategies and working capital funding programs offered by Capital Funding Solutions to small businesses and companies



Factoring Accounts Receivables:
Decision Criteria for Selecting a Factor, Part II


Factoring Accounts Receivable Pitfall #6 – Not knowing what services attract extra fees

Certain factoring companies charge extra fees such as: a line of credit fee (1-2% of total amount of available credit), a management fee (1-2% of total amount available for factoring), a new account setup fee, wire transfer fee, per invoice transaction fee, due diligence fee, termination fee, and a number of other fees they can include. Most factors charge a wire transfer fee, but the other incidentals are simply attempts to increase their revenue.

Since these incidental fees can add up, pay careful attention to your agreement to ensure that you are not agreeing to pay fees for normal and customary business expenses that should be part of the factor’s general overhead.

Some factoring companies charge no extra fees other than for wire transfers.

Invoice Factoring Pitfall #7 – Not understanding the factoring fee structure.

This is a major pitfall since understanding a factoring fee requires that you know about percentages, appropriate terms, how the fee is applied and the time/value of money. This section and the next will help enlighten you so you can first understand how the fee is determined, and how then to compare differing fees and structures.

By not understanding how a factoring fee is determined, you open yourself up to paying excessive fees, so please take the time to study this section and then work through the examples given below.

The fee structure usually has two components – advanced funding and factoring fee. These are usually determined by the amount you intend to factor and the financial strength and creditworthiness of your customers:


 


Advanced Funding: When you submit an invoice for factoring, you will typically receive between 60% and 90% of the invoice amount by wire transfer to your bank account within 24 hours after invoice verification. This is your money to use as you wish.


 


Factoring Fee: Many factoring companies impose factoring fees based on a “per 30 days fee” (such as 2.5% per 30 days). This carries some obvious negatives. Should your customer pay the factor in 33 days, your fee would be: two 30-day periods X 2.5% =5% of the invoiced amount even though your invoice was outstanding for only 33 days. This can prove to be quite expensive.


 


By contrast, a “per 5-days fee” of .45% on the above example delivers you a factoring fee of: 7 periods X .45% = 3.15% of the invoiced amount. Generally, the shorter the “per days” period, the less you will actually pay for the service.
Further information on fee determination is given below under Pitfall #8.

   

Also, please see below Pitfall #11 - the section on Reserve Funds - to learn how all the money is accounted for.

Cash Flow Factoring Pitfall #8 – Accepting an initial “teaser” fee.

Some factoring companies promote a loss leader initial “teaser” fee, counting on the fact that many people don’t understand how factoring fees work, the time/value of money and when your customer’s usually pay their bills. Depending on the number of days your customer takes to pay your invoices and this typically varies, you will usually end up actually paying a higher fee that might be the case under a higher initial fee and a different fee structure.

Here are several examples that you can follow to calculate your actual factoring fee on an invoiced amount of $100,000:

Factoring Fee Offer #1 – 1.65% for first 25 days and 1.5% each fifteen days thereafter.
 


Days to
Clear Invoice


Amount


Rate Calculation


Actual Fee

30

$100,000

1.65% + 1.5%
= 3.15%

3.15% X $100,000
= $3,150

41

$100,000

1.65% + 1.5% + 1.5%
= 4.65%

4.65% X $100,000
= $4,650

58

$100,000

1.65%+1.5% +1.5%
+ 1.5%  = 6.15%

6.15% x $100,000
= $6,500
 

Factoring Fee Offer #2 - .45% per each five-day period


Days to
Clear Invoice


Amount


Rate Calculation


Actual Fee

30

$100,000

.45% x 6 = 2.7%

$2,700

41

$100,000

.45% x 9 = 4.05%

$4,050

58

$100,000

.45 X 12 = 5.4%

$5,400



You can readily see from the above examples that what appears at first glance to be an attractive fee is actually more expensive when you actually apply the fees for the various “per-day” periods.

Receivables Factoring Pitfall #9 – Not knowing when your customer’s usually pay your invoices

Factoring your invoices involves a significant uncontrollable variable – the usual time period your customers take to pay your invoices. As you can see from the above examples, the shorter the period, the lower your factoring fee.

For example, if your customer customarily pays your invoices in say, 15 days or 35 days, you don’t want to agree to a “per 30 days fee”. You will pay lower fees by working with a shorter “per days fee”, as outlined above.

Be sure to either calculate your actual fee as it applies to your situation or seek absolute clarity about this from your intended factoring company.

Factoring Accounts Receivables Pitfall #10 – Not realizing how aggressively some factoring companies pursue account collection

Another reason to avoid the “per 30 days fee” is that it gives the factor a financial incentive to pursue aggressive account collection. Once the first 30-day period has passed, the factoring company wants to collect the outstanding account as quickly as possible to maximize their own rate of return on the funds advanced. For example, if they can collect payment for your invoice on day 33, you still are charged fees for 60 days while they have freed up funds to generate additional fees during the same period.

Whether the factor does this aggressively or not, depends on the factoring company. However, it’s not an unknown practice in the industry. While good for the factor, a “hard-nosed collections” approach can negatively affect, even perhaps ruin your relationship with your customer.

This is another good reason to seek a shorter “per days fee”, and to check out how your proposed factoring company typically handles this situation.




Factoring Informational News Articles:
Selecting an Invoice Factoring Company: Best Practices, Part I
Selecting an Invoice Factoring Company: Best Practices, Part II
Selecting an Invoice Factoring Company: Best Practices, Part III
 


 


Cash flow funding and working capital financing programs are offered to small and medium businesses in Clearwater Orlando Miami Ft. Lauderdale Tampa and St. Petersburg Florida
www.finance-factoring.com


Capital Funding Solutions



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