How Much Does Invoice Factoring Cost?
The cost of invoice factoring is a common concern among factoring prospects. Despite what you have heard, the "one-size-fits-all" rule does not apply. The final cost for you will depend on the terms of your factoring agreement, which is based on your individual company and client portfolio.
When you choose to work with Alliance One or other factoring companies, you are agreeing to create a mutually beneficial relationship. The goal is to create success for both parties. We do this by working together to sell your invoices in order to receive dependable cash quickly, while the factoring company charges a per-invoice factoring fee called the factoring rate.
Before you choose to work with Alliance One or another factoring company, it is important for you to understand what a factoring rate is and how it is determined.
What Determines a Factoring Rate
When you work with Alliance One, we work with you to customize a factoring fee based on what is best for your company. Typically, the factoring fee is influenced by the industry, the volume, and the risk associated with your business.
Depending on the industry of your business, your factoring fee will differ. For example, a trucking or transportation business will have a more reliable and higher volume of billable invoices, which means that they will have a lower factoring rate compared to other industries.
Before determining your factoring fee, the factoring company will ask how much you plan to factor in per month. The more you factor, the lower your rate will be. Some factoring companies will work with you to create a tiered plan, depending on your anticipated growth.
Typically speaking, when there is a higher risk there is a higher rate. The diversity of your customer portfolio is considered when calculating your risk, and it is often less risky for a factoring company to buy several small invoices from multiple customers, rather than buying a couple of very large invoices from a business with only two customers. You’ll get a lower rate with a more diverse book of customers, especially if most of them have good credit.
Other than industry, volume and risk, there are other factors that determine the factoring rate. Alliance One will consider your credit score, how long you've been in business, and your average annual revenue.
Different Types of Factoring Rates
As we previously mentioned, there are not only flat rates but there are also tiered rates. A flat factoring rate is determined by the percentage you pay on each factoring invoice. A tiered factoring rate is determined by how quickly your customers pay their invoices. Your rate will be lower for customers who pay more quickly and higher for customers who take longer to pay.
What is a Typical Factoring Rate
A factoring rate for a trucking company will typically fall between 1% and 5%, however, these rates will vary depending on the industry, volume, risk, etc. At Alliance One, our fee typically ranges between 2% and 3% for the first 30 days and increases an additional 1% for every ten days thereafter. Before connecting with us, we recommend coming to us with a time frame in which your customers pay for their invoices because it will help determine which tier or flat fee factoring plan works best for your business.
We are direct lenders, not brokers. Our staff is not commission based, which is why we can deliver to you, the lowest fees in the industry.
Not all factoring companies will charge you an additional fee, but some will. There are fees such as invoice-processing, ACH or wire transfer, startup, maintenance, etc. Some factoring companies choose to roll these into their overall factoring rate, but some will charge case-by-case. The additional fees are not necessarily bad, but it is important that a factoring company is an upfront with you about them in order for you to know what to expect.
Alliance One factors in a funding advance, meaning they will advance between 80% and 90% of the invoice face amount. If you have an invoice for $100 and your advance percent is set to 90%, you will be sent $90.00. The other $10.00 will be placed in a reserve account, where the money is returned to you (less our factoring fee) after the invoice is paid.
There are many things to consider before deciding on a factoring company, and the cost of factoring is certainly one of them. If you are interested in working with Alliance One, please do not hesitate to contact us at your earliest convenience!