Most people compare factoring companies by the factoring rates because rates seem the easiest to understand. If you factor a $1,000 invoice and the factoring rate is 1.5% then you should receive $985, right? Sounds like a pretty good deal. But this is not always the case. Hidden fees are sometimes used by factoring companies to nickel and dime invoices. Before you know it, you are actually paying 6%, 10%, or 20% each time you factor. The best way to avoid this situation is to be informed. Don’t be like John Doe.
John Doe’s Story
John Doe is a victim of the teaser rate. He signed up with ABC Factoring after they promised him a 1.5% factoring rate. It sounded too good to be true and John Doe did not want to pass up the supposed opportunity. But things took a turn for the worse after John Doe sent ABC Factoring is first invoice.
John’s invoice was for $1,000. With a 1.5% rate, he expected the factoring company to pay him $985. But John didn’t plan on the $25 overnight fee, the $5 invoice submission fee, and the $15 invoice processing fee. The 1.5% rate quickly jumped to 6%. Do not forget the $300 setup fee. Now John Doe is only receiving $640 for his $1,000. And it doesn’t stop there. John also pays a $100 monthly membership fee just to be able to send invoices to ABC Factoring. Even if John submits 10 invoices a month, he’s still paying an extra $10 per invoice. John’s rate is now a MINIMUM 7% per invoice just to factor with ABC Factoring. PLUS if John’s customer doesn’t pay ABC Factoring for an invoice within 30 days, John will be charged another $50 fee. John is constantly hustling to stay afloat all because he was tricked with a 1.5% teaser rate.
Don’t be like John Doe: Ask Questions
Don’t be like John. Arm yourself with the right questions to ensure you are receiving the best deal. Before you choose a factoring company, make sure you get answers about their fee structure:
Are there setup or application fees?
Do they charge an invoice processing fee?
What is the recourse period?
If your customer is late paying an invoice, what are the late fees?
Are there any monthly fees?
Is there a monthly minimum invoice commitment?
Do not hesitate to ask questions. The more questions you ask, the better understanding you will have of a company’s factoring practices. If a company skirts questions or flat out refuses to answer, you probably do not want to trust them with your business. Getting blindsided by fees can be devastating to your business. Make sure you are doing business with a factoring company with a transparent policy.