What is the Cost of Factoring?
When your business needs money quickly, it’s natural to take money from the first place that offers it. However, going into the wrong loan could do more harm than good for your business. Some may give you the necessary amount of money but also end up costing you all of your capital in the long run. Hidden fees, high interest rates and more – make the wrong move, and your business could end up in worse shape than it was when you needed the money in the first place. You have to know the true cost of a loan before you sign. Factoring is an option many entrepreneurs choose, and before you decide if it’s right for you, you should know how much it really costs.
One Fee, Maybe
The good news: there’s one signup fee. Sometimes, it’s referred to as a “setup” or “diligence” fee, and there are many other names. Often, there are invoices of a particular customer you want to factor. The factor performing the cover check uses this fee to pay for that. Many times, that’s the only fee upon sign up. For this to work, your customer has to pay the invoice. If they do, everything is fine. If they don’t, look out. Then, factoring advance interest payments could kick in. Or you could even have to fork over some legal fees.
Choose Your Customers Wisely
You know your business and you know your customers. If you have customers you don’t think can pay an invoice, don’t factor their invoices. Customers with a good payment record can really make factoring work for your company. Not only will you have the money from the factor, but you won’t have to pay any interest payments or legal fees.
What You Save Goes Into the Price
Your business could get a bank loan, but that has so many extra fees attached to it. You’ll have to add up the closing costs and the interest on top of the initiation fee. Also factor into the cost of the bank loan the time it will take for you to get the money. A factor can do so quickly; a bank loan can take weeks or more. That’s not a viable option if you’re threatened with an immediate cash flow emergency. Eventually, you might need more funding. With a loan, you’ll have to pay all those fees all over again. Factoring also makes sure that you’re getting the most money out of your invoices. Maintaining receivables, having to resend invoices and filing records takes both time and money. Your factor takes all of those responsibilities over from you, leaving you to devote more focus on running your business.