Invoice Factoring Rates Explained
If you read our recent Should I Use a Factoring Service post, you probably have a good idea of whether or not accounts receivable financing is right for you and your business. Once you’ve decided that it is, or if you’re already factoring, one of the most important items to consider when choosing between factoring companies is invoice factoring rates. While this may sound simple, we’re not talking about just one number (ex. 1.5%), but instead how the rate is structured. The two most common rate structures offered by factoring companies are the flat rate and the tiered rate:
Flat Invoice Factoring Rates
A flat rate structure means that you pay a single flat percentage on your funded invoices regardless of when they are collected. For example, if your flat rate is 3% and you factor a $1,000 invoice, then you pay a $30 fee whether that invoice gets paid in 10 days or 60 days (assuming 60 day recourse). The advantage to structuring your invoice factoring rates like this is that you will always know exactly what your cost of factoring will be before you factor each and every invoice.
Tiered Invoice Factoring Rates
Unlike a flat rate, a tiered rate structure has a rate that changes based on the amount of time it takes your customers to pay. The actual rate you are charged on any given invoice is determined after collections by referencing the agreed upon rate schedule. Factoring companies offer a number of different rate schedules, see just two examples below:
Example 1
.75% every 10 days
Example 2
1.5% first 30 days
2.5% every 30 days after
The primary difference between the above two examples is that example 1 shows a consistent tiered rate while example 2 shows an increasing tiered rate. Neither is “better” than the other in and of itself, but the “best” rate structure largely depends on the collection times of your business and its customers.
Rates Compared
All else being equal, when your customers pay quickly, a tiered rate tends to be cheaper than a flat rate. On the other hand, late paying customers often cause a tiered rate to be more expensive than a flat rate. Let’s look at how the 3 examples above compare using a $1,000 invoice and a 10 day, 30 day, and 60 day collection time:
10 day
Flat rate = ($1,000 x 3%) = $30
Tiered rate #1 = ($1,000 x .75%) = $7.5
Tiered rate #2 = ($1,000 x 1.5%) = $15
30 day
Flat rate = ($1,000 x 3%) = $30
Tiered rate #1 = ($1,000 x .75% x 3) = $22.5
Tiered rate #2 = ($1,000 x 1.5%) = $15
60 day
Flat rate = ($1,000 x 3%) = $30
Tiered rate #1 = ($1,000 x .75% x 6) = $45
Tiered rate #2 = ($1,000 x 4%) = $40
As you can see, there is no clear winner. The “best” rate option depends entirely on the amount of time it takes to collect in the above examples. Therefore, the key to deciding which rate structure is best for your business is having an honest understanding of your average days outstanding for the customers you wish to factor.
At Orion Business Capital, we believe in saving our customers money by providing them with the rate structure that best fits their circumstances. If you’d like to learn more about the invoice factoring rates we can offer, please Contact Us today for a discussion about your business and it’s needs.