Accounts receivable (AR) factoring companies like Thales Financial do not make loans or charge interest. Instead, factoring involves buying invoices and paying cash advances on them in exchange for factoring fees. A question we frequently hear in relation to fees is how AR companies determine them.
Business owners want to know what goes into deciding how much a factoring company charges. AR factoring companies don’t all do things the same way. We all have our own formulas for determining fees. As a general rule though, there are certain things that need to be considered.
1. Invoice Value
All the invoices an AR factoring company purchases must be collected in the same way and in a timely manner, regardless of their value. But because higher value invoices represent higher value assets, factoring fees tend to be lower as a percentage of that value. In simple English, invoices with higher monetary values tend to incur lower overall fees.
2. Invoice Volume
Hand-in-hand with invoice value is invoice volume. Though there are exceptions to the rule, a higher invoice volume tends to incur lower total fees. AR factoring companies prefer higher volumes of invoices rather than just one or two at a time.
3. Customer Credit History
The next factor is a big one: customer credit history. AR factoring companies do not necessarily turn down invoices from customers with questionable credit, simply because invoices are legally enforceable claims for payment. But it is understood that collecting from such customers may be more difficult. Therefore, the risk increases.
The general rule is to charge higher fees on such invoices. The worse a customer’s credit history is, the higher the fee for that invoice. Higher fees for poor credit customers is one of the ways factoring companies protect themselves against potential losses.
4. Company Credit History
AR factoring companies also need to consider the credit history of the companies from whom they are purchasing invoices. A poor credit history could suggest that a company is making use of account receivable factoring in ways that would otherwise be unadvisable. A company relying exclusively on factoring to preserve cash may be too much of a risk.
Again, the general rule is to charge higher fees commensurate with a poor credit history. The poorer a company’s credit, the more accounts receivable factoring will cost.
Many Other Factors
The four factors described here are neither iron-clad nor exclusive. Factoring companies can look at a whole host of things depending on how they choose to do business. The key for business owners is to know the details behind the fees they would be expected to pay before selling their invoices.
As a business owner, accounts receivable factoring could be a very useful tool for maintaining cash flow, facilitating growth, or just paying your own bills during seasonal downturns. Just understand that not all AR factoring companies do things the same way. It is in your best interests to shop around the same way you would for any other business service.
Fees Are Part of the Game
In closing this post, we want to remind potential clients that fees are part of the game with account receivables factoring. Factoring is a service provided by a company like ours. It is not a loan instrument. Because invoice factoring doesn’t involve traditional loans, we do not charge interest. Instead, our service is fee-based.
We have set criteria for determining our fees. So does every other AR factoring company. If you feel our fees are reasonable and our service is right for you, let us talk about turning your accounts receivable into cash.