Evaluating Invoice Factoring Services
Compare key components found in proposals for invoice factoring services: factoring advances and fees, client obligations and factoring company benefits.
Comparing Invoice Factoring Services
The key components that you will find in proposals for invoice factoring services generally come down to three things: The amount of factoring advances and fees, client obligations and factoring company benefits. Here’s what to compare when choosing between invoice factoring services:
- Advance Rates
- Reserve Rates
- Factoring Fees
- Add-on Fees
- Funding Options
- Account Limits and Debtor Limits
- Monthly Minimums or Factoring Requirements
- Contract Length and Termination Clauses
- Buy Back Stipulations
- Factoring Client Obligations
- Factoring Program Benefits – Factoring Company Promises
Invoice Advances, Reserves and Factoring Fees
- Advance Rate: This is the amount (usually expressed as a percentage) of the face value of an invoice that the factoring company will fund when you factor an invoice.
- Reserve Rate: The reserve is an amount (usually expressed as a percentage) of the face value of an invoice that the factoring company will hold back “in reserve” pending payment from your customer on a factored invoice.
- Factoring Fee: This is the cost of factoring an invoice. Like the advance and reserve, it is often expressed as a percentage of the face value of an invoice the factoring company will retain as it’s fee when you factor an invoice.
Added together, the advance rate, reserve rate and factoring fee should equal 100%. Here is an example of their application:
- Day 1 – Factor an invoice and get same-day funding of 98% of the invoice amount, with 1% held in reserve and a 1% factoring fee.
- Day 30+ – Receive the 1% reserve after your customer has paid the invoice (factoring company retains the other 1% as their factoring fee).
Some factoring companies use low introductory rates or progressive fee structures that sound appealing, but actually represent a higher invoice factoring fee than many of their competitors.
Some factoring fees are flat – meaning the small percentage is the only cost of factoring an invoice regardless of how quick your customer pays the invoice. Other factoring fees might sound low but when reading the fine print, are actually assessed weekly instead of monthly, or are progressive in some other way.
We offer factoring fees as low as 1%; however, even if your factoring fee at DB Squared was 2.5%, it might be lower than a 1% fee offered by a factoring company that assessed the fee weekly if your customer takes more than 21 days to pay. Given that payment terms are often 30, 60 or even 90 days, a 2.5% flat fee will nearly always be far more economical than a low fee applied progressively.
At DB Squared, the factoring fee is the “all in” cost of factoring an invoice since we offer free same day funding on advances via ACH. If one of our factoring clients chooses wire funding or EFS fuel card funding options, small fees may apply. Use our free invoice factoring calculator to see how our invoice factoring services could expedite your organization’s working capital and get an idea of estimated factoring fees that might apply.
Some factoring companies have add-on and hidden fees that should be taken into consideration when comparing invoice factoring services; such as fees that will be charged for:
- Schedule processing
- Collection activities
- Due diligence
- Customer credit checks
- Online account access
- Account administration or maintenance
- Funding fees (which may vary depending on method of funding)
- Buy-backs / chargebacks
When reviewing a proposal for invoice factoring services, look beyond the advances and factoring rates to determine if there are add on or hidden costs that might drive up the real cost of invoice factoring, thereby reducing its benefits as a cash flow management tool.
In addition, your proposal for invoice factoring services should also outline the account limit (how much money the factoring company will have out on advances at any given time for all factored invoices) and account debtor limits (the amount the factoring company is willing to have out on advances at any given time for an individual debtor).
Factoring Client Obligations
Client obligations are the conditions that you agree to fulfill in your relationship with the invoice factoring company. These terms may include personal guarantys, buy back stipulations (especially when factoring with full recourse), monthly minimums, contract termination and notification requirements, and monthly reports your company agrees to provide to the factoring company.
The terms which define your obligations as a factoring client could vary greatly depending on which company’s invoice factoring services you are considering. Let’s take a closer look at those which can radically impact how effective the factoring company’s program will be in helping to expedite cash flow for your organization.
Buy Back Stipulations: These are conditions that would require you to buy back an invoice previously factored. Full recourse factoring companies will often require you to buy back invoices if they go unpaid for a period of time, sometimes even as little as 30 days. They will also require you to buy back invoices if they are not paid due to credit reasons, such as insolvency of your customer. Buy back stipulations may also require you to reimburse a factoring company for collections or legal activities undertaken in trying to recover unpaid customer payments.
DB Squared is primarily a non-recourse factoring company. What this means for our clients is additional financial protection; if an invoice that has been factored is not paid due to insolvency of your customer, we absorb the loss. In general, our clients are not required to buy back invoices unless an invoice is disputed by your customer. Since our factoring fees are comparable to companies that factor with full recourse, this becomes an important consideration for those comparing the details of different invoice factoring services.
Factoring Minimums: Some factoring proposals require that a client factor a minimum dollar amount, or may stipulate a higher fee if minimums are not met. Some proposals require that a client factors any and all invoices generated for a given client.
DB Squared proposals don’t include monthly minimums or other factoring minimums. We want our clients to be able to do what is in the best interest of their organization; our clients factor only when they choose to do so.
Contract Termination and Notification Clauses: If you decide to stop factoring or you have determined that the invoice factoring services offered by another company would be better for your business, some factoring contracts will require that you provide advance notification – sometimes as much as 120 days in advance.
Failure to meet the notification requirements might make it impossible for you to make a change without absorbing significant financial penalties, or you may have to wait another 8-9 months before you can stop factoring or change factoring companies.
This is another area where our invoice factoring services could be preferable for the simple fact that we don’t require clients to sign long term contracts.
UCC-1 Filing: As a client, you should never sign a proposal that gives a factoring company authorization to file a UCC-1 financing statement on your business before you have been allowed to review all of the closing documents (e.g., factoring contracts) that will apply to the relationship.
Factoring Program Benefits
The benefits outlined in proposals for invoice factoring services that will be provided by the factoring company are the promises and perks that their clients will enjoy, in addition to expedited cash flow from factoring invoices. This includes factoring advance rates but may encompass promises of good customer service, dedicated account managers, client online account access, reports, funding options, credit checks on customers and industry-specific benefits like those offered to our transportation factoring clients; e.g., free enrollment in EFS Fuel Card and TruckersB2B.
Since the program benefits provided by factoring companies may vary greatly, we will describe the factoring program benefits we outline so that you can compare those to other invoice factoring services you might be considering. DB Squared clients enjoy:
- Free same day funding on advances (ACH)
- Additional funding choices (EFS fuel card funding for transportation clients, wire funding)
- Free credit checks (our clients can do credit checks on their customers at no cost)
- Consistently high level of professional customer service
- Dedicated account managers who understand the client’s business and preferences
- 24 x 7 online account access
- Transparency – no hidden fees
- No application or account administration fees
- No long term contracts or monthly minimums
- Factoring fees as low as 1%
- Highly competitive advances – up to 98%
Plus, our fees are comparable to companies that factor with full recourse so our clients don’t pay more for reduced financial risk from bad debt by working with one of the few – and best non -recourse factoring companies in the U.S. Our program also provides additional benefits to transportation and trucking factoring clients including:
- Free enrollment in EFS fleet fuel cards to fund drivers on the road 24×7, control costs, manage expenses and improve operations
- Free enrollment in TruckersB2B for discounts on fuel, oil, tires and dozens of other products and services
Expect These Types of Benefits of Invoice Factoring Services with the Best Factoring Companies
The primary reason companies factor invoices is to expedite cash flow, whether this is needed for meeting expenses or desired so that the company can grow more quickly, or both.
When comparing invoice factoring services, take into account the extent to which the program seems designed to help you speed up cash flow so that you can reinvest in your organization more quickly.
The best factoring companies look for reasons to say “yes” when it comes to approving a client or approving an account debtor, even when it means looking past a credit score or list of assets.
The best factoring companies offer competitive rates and fees and have a program that is transparent, so that their clients are not hit with unexpected fees or surprises.
The best factoring companies leave more decisions up to the client so that they can do what is in the best interests of their organization.
The best factoring companies become trusted financial partners because they design their programs, operate and provide professional customer service – day in and day out – with a view for the long-term.
Get a free, no-obligation proposal for invoice factoring services or request more information about our programs.