Invoice factoring is a lifeline for many businesses, offering a quick infusion of cash to address a working capital crunch or service a new account. What does invoice factoring cost, though? And what determines factoring rates for invoice factoring?
This article pulls back the curtain on key factors that influence factoring rates to give business owners much-needed information to make decisions about invoice factoring.
What is invoice factoring?
Definitions first, though: invoice factoring is a financial tool for businesses of any size to gain access to working capital. It’s an alternative to bank financing when traditional financing is not an option or may take too long.
In invoice factoring, a business sells its accounts receivable to a factoring company. The business receives an immediate cash advance, and the factoring company collects the outstanding invoices from customers. Once it does, the factoring company pays the business the balance minus a service fee.
Factors affecting factoring rates
While “what does factoring cost?” is a common question, the answer can depend on a variety of factors. These can range from the risk the factoring company takes on in collecting on outstanding invoices to the type of factoring. Let’s break down each aspect for more insight on why and how they affect invoice factoring rates.
Finally, not all invoice factoring companies are created equal. Administrative and discount fees can shape rates and can vary widely between companies. Some companies may be more flexible with rates and terms than others, too. Be sure to thoroughly review the policies and fee structure when considering factoring your invoices. As a business owner, it’s crucially important that you make the best decision for your business by understanding the factors that determine factoring rates. When you do, you can use invoice factoring as a strategic financial tool to increase business stability.
Looking for help demystifying factoring rates? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
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