The Hidden Costs of Invoice Factoring
Six hidden costs some invoice factoring companies charge that could make factoring invoices less effective as a cash flow management tool.
6 Hidden Costs that Reduce the Benefits of Invoice Factoring
1. Add-On or Administration Fees
Though it seems like administrative services should be part of the service provided, some invoice factoring companies tack on extra fees for the administrative tasks that are part of the invoice factoring process. We don’t charge extra fees to process your paperwork; what’s more, our account managers consistently provide a high level of courteous, professional service to our invoice factoring clients – it’s one of the reasons we have a high client-retention and client-return rate. Some of the other hidden fees factoring companies might tack on include things like:
- Application fees
- Proposal fees
- Due diligence fees
- Credit check fees
- Notification fees
- Schedule processing fees
- Invoice processing fees
DB Squared doesn’t charge for any of these administrative tasks. We view them as part of our service in helping to get a business approved to factor invoices, and in setting up, maintaining and professional administration of client accounts. The only funding-related fees passed on to clients include a wire fee for same day wiring of funds to a bank account (there is no fee for same day funding through ACH) or a small fee to fund a transportation factoring client’s fuel card account (currently just $3).
2. Long Term Contracts
Some factoring companies require clients to sign long-term contracts that might range from 6, 12, or even 24 months, and harbor strict renewal and notification clauses. If a client doesn’t adhere to the contract’s conditions or needs to be released from the contract before the terms are up, significant penalties are often assessed. We don’t require our clients to sign long-term factoring agreements; we want to earn your business the first time, and your repeat business on an on-going basis.
3. Monthly Minimums or Other Minimum Factoring Requirements
Some factoring companies require clients to commit to factoring a minimum number or dollar amount of invoices every month (or every quarter, etc.) and if they fail to meet these minimums a penalty fee may be assessed. Being locked in to factoring minimums may not be what is best for an organization. Factoring is a financing tool meant to help an organization grow more quickly, so we want each of our clients to have the freedom to do what’s best for their business. As a client of DB Squared, you have the freedom to factor only when you choose to do so.
4. Introductory Rates, Fees or Other Conditions
Some factoring companies offer a very low introductory rate to new clients, then down the line they lower advance rates or raise factoring fees, quickly wiping out any savings enjoyed during the introductory period. We don’t rely on gimmicks or introductory rates. As our client, you will know what your advance rate and factoring fees will be from the outset, so you can make financial decisions in the best interests of your organization.
5. Lost Customers
When an organization factors invoices, the relationships they have with their customers may also be impacted by the factoring company they chose to do business with. A factoring company that engages in strong-arm collections tactics or pressures customers to pay more quickly could result in lost customers for a business. We want to help you grow your business, and so we are committed to extending the same professional, courteous customer service that we provide to you as our client to your customers as well.
6. Recourse Factoring Buy-Back Stipulations
Most factoring companies factor invoices with recourse. Organizations that work with full-recourse factoring companies may be required to buy back an invoice at its full face value if a customer does not pay within a given period of time, or for any other reason. DB Squared is a non-recourse factoring company, which means that we assume the credit risk for the invoices we factor, and (in most cases) absorb the loss if a customer is unable to pay.
Working with a non-recourse factoring company like DB Squared minimizes your financial risk because it reduces – or even eliminates – bad debt. Find out more about the differences between recourse and non-recourse factoring here.
Add-On Fees, Intro Rates and Other Hidden Costs of Invoice Factoring
Use our invoice factoring calculator to find out how much working capital you could unlock by factoring with us or request a free, no-obligation quote.
When comparing the invoice factoring proposals of U.S. factoring companies, remember to look for additional costs and add-on fees in addition to the factoring fee that is being offered.
These fees and charges may seem small but when you do the math you can clearly see that they quickly eat into your business’ profits and jack up the real cost of invoice factoring.
Our high client-retention rate speaks volumes about the way we do business.
Transparency with our customers is one of the guiding values at DB Squared so we keep our invoice factoring program free of the hidden fees and add-on costs some other factoring companies use to produce additional revenues. Our fee structure is transparent and the minimal factoring fee you will be charged to factor an invoice is your all-in cost.
Since it is likely your intention to utilize invoice factoring to speed up the incoming cash flow from invoices currently on your books (and thus get that working capital back into your business more quickly) it stands to reason you should compare the advance amounts and factoring fees offered by factoring companies (or Factors).
In addition, you should be an educated, astute shopper of these services and never “sign on the dotted line” until you know exactly how the program works, all of the fees that may apply, and how factoring your invoices could impact your profitability.
If you have questions about your factoring contract or would like to find out more about our program, contact us at 866-855-3640 or apply and we will be happy to provide you with a factoring quote or proposal which you can compare against your current agreement.