Although there are numerous ways to quote factoring rates, they all boil down to dollars and cents. There are several elements to take into consideration in order to accurately estimate the cost of factoring.
How much does Factoring Cost?
Many factoring companies will advertise low factoring rates, but a simple percentage rate doesn’t really give you the information you need to calculate the real expense to your company. Some of the questions that you need to ask to determine the real cost of factoring include the length of the factoring period, as well as the advance that you will receive from the factoring company. Essentially, you need to know:
- The factoring rate
- How much money your business will be receiving for an invoice
- The length of the factoring period before you can calculate the cost to your company
As it costs less to factor quick-paying accounts and more to factor slow-paying accounts, it is best to be conservative when estimating the average days to pay (“DTP”) for your customers. When we ask an applicant the average time it takes its customers to pay, we often hear 35 to 45 days. In reality, most small business owners don’t track this statistic, so it is usually a best guess.
If you give your customers extended credit terms, like Net 45 or Net 60 days, your average DTP is going to be higher. If you offer more “standard” credit terms, like Net 30 days, your average DTP will be lower.
The next step is to decide how much you wish to factor. Some factoring companies require you to factor all your accounts and invoices. We do not. You decide which accounts and invoices you wish to factor.
These are two of the most important variables factoring companies consider when pricing your contract: factoring volume and account quality (turnover). Generally speaking, a turnover of 8 times or more per year is considered satisfactory (assuming “standard” credit terms of Net 30 days), equating to 45 days DTP; a turnover of 9 times per year equates to 40 days DTP; a turnover of 12 times per year equates to 30 days DTP, and so on and so forth. The higher the accounts receivable turnover, the lower the factoring rates. The lower the accounts receivable turnover, the higher the factoring rates. Similarly, the higher the estimated monthly factoring volume, the lower the factoring rates, and vice versa.
An applicant expected to generate enough volume for the factoring company to collect $100,000 per month, combined with an accounts receivable turnover of 9 times per year, should qualify for rates around 2%, or about $2,000 per month. While many factoring companies only advertise their factoring rates, you need to look beyond the advertised rate and read the fine print so that you understand any additional fees and plan details that might impact your bottom-line.
The cost of factoring can be worthwhile for your business if you partner with a company that offers competitive factoring rates paired with top-notch customer service. Interstate Capital’s factoring experts are ready to work for you! Get started today with a free factoring assessment.