More than 30 years ago, it was not uncommon for larger, diversified banks to have their own factoring divisions. Some of these divisions were formed out of independent factoring companies that were acquired by a bank. However, going to banks was not a business owner’s only option for factoring: a few major factoring companies remained independent.
Interestingly, compared to today’s factoring rates, the rates at some of those banks factoring divisions were somewhat high. Some rates included expensive commitment fees, fees on the unused or unfunded portions of asset based lines of credit, and factoring commissions of 2% to 2.5% plus interest. Typical interest rates on factoring and asset-based loans were Prime Rate plus 4% to 5% in the 1980s. Factoring contracts were paying banks effective annual rates of 25% to 30%, depending on their accounts receivable turnover ratio.
Bank Factoring Competition
Eventually the competition among banks’ factoring divisions and factoring companies, combined with historically low interest rates, made the cost of factoring about half of what it was 30 years ago. In addition, technological improvements and efficiencies allowed factoring companies to provide faster funding and a broader range of services than what they were able to deliver in the 1970s and ‘80s – and rates could go down.
If bank factoring divisions and independent factoring companies received a reputation as an expensive financing vehicle in the ’80s, perhaps it was deserved. The good news is that today’s business owners who want to turn their accounts receivable into cash in their pockets have much more affordable factoring options with rates as low as .49% and .99%, depending on the client’s invoice volume and value.
Business owners also have more accessible factoring options. Factoring companies operate with broader eligibility requirements and welcome companies with less than perfect credit scores or substantial collateral or equity. The fact is that banks have tightened their lending policies. It doesn’t mean that banks no longer offer funding, but if your company’s not profitable right now, you can bet they’re not going to make it easy.
For instance, if your company has a revolving line of credit at a bank, credit union or other federally insured financial institution, you may find that renewing that credit is not as easy as it used to be. In fact, you may have already heard from your bank that it wants to reduce your line of credit or that it is requiring more collateral. Invoice factoring provides an accessible and inclusive option for companies with creditworthy customers regardless of their balance sheet or longevity.
Difference between Bank Factoring and Borrowing Video
Another improvement over banks’ factoring divisions is the speed to funding at typical factoring companies. Approvals happen in a few days, not a few months. Factoring companies streamline the whole process without the need of a bank. In addition to providing far greater availability against your accounts receivable than what banks would provide, top-tier factoring companies can also act as your credit department, assisting you to establish prudent credit limits for your customers.
Factoring companies today can provide credit approval in minutes online or over the phone, deliver reports online 24/7, and transfer funds with the push of a button. In addition to providing credit and funding services, the country’s top factoring companies provide another time- and money-saving service that banks don’t offer: a professional collections department. Automated statements are sent to your customers to assist them in paying you more quickly and follow-up phone calls and emails ensure that any obstacles to slow payment are resolved.
Adding Invoice Factoring to Your Funding Portfolio
When you’re ready to work with a leading invoice factoring company to speed up your cash flow, Interstate Capital advances more money, helps you reduce credit losses, and saves you time and money by collecting your payments for you than the bank factoring divisions of the past. You get paid right away on your invoices, rather than waiting 30, 60, or even 90 days, and you enjoy value-added services and benefits.
Factoring is a cash flow solution that will work well with your existing banking relationships. For instance, if your company has a line of credit and the primary collateral is accounts receivable, you may consider adding factoring as a tool to raise additional funds for working capital or for expansion capital. The knowledgeable factoring experts at Interstate Capital can analyze your commercial accounts receivable, determine the value, and advance your company funds to pay off your line of credit. They can also make additional funds available to your business.
Since 1993, Interstate Capital has seen many changes in the factoring industry – changes that have made factoring more affordable and accessible. Interstate Capital’s founders, who continue to manage the company today, are proud to provide a new generation of options and services that go well beyond what was offered at bank factoring divisions in years past.