As with any type of financing, there is a cost associated with factoring ad the access to working capital it brings. There are three primary ways that factoring companies assess fees. They charge a flat fee, tiered fees, or an administrative fee and interest. We will analyze these three types of fees along with other fees that can be or are often included in a factoring contract or transaction.
Flat fees, sometimes called fixed fees, are the easiest to figure out as you pay a flat percentage on all the invoices you factor, no matter when they are paid. For example, the factoring company charges 2% on invoices that are collected within a certain period of time, usually around 60 to 90 days. If you factor $2000 in invoices with a flat rate of 2% up to 60 days, you pay $40 (2% of $2000) as long as the payments are collected within 60 days. Obviously, calculating your costs with this method is relatively straightforward. All you have to do to calculate your costs is subtract the percent of the fee from the total dollar amount of your invoices paid within 60 days.
Tiered fees can get a little more complicated. A tiered payment schedule bases cost on the time frame within which your customers pay their invoices. You get charged lower fees on faster paying customers and higher fees on slower paying customers. For example, $2000 worth of invoices collected between 31 and 40 days costs $40 (2% of $2000) with the following schedule of rates.
Although the percent increase and the outstanding invoice period go up a consistent interval each time, this is not always the case. You might also see a tiered schedule that fluctuates more. For example, the percentage may only go up by .5% instead of 1% for some tiers and the time frame may increase by a different increment, such as 15 or 20 days.
Here's what the tier schedule could look like:
Schedule of Fees
Notice the percentage goes up by .5% and then jumps up an extra 1% if the invoice is paid after 60 days. Also, the first-time increment is 30 days, but then additional fees are assessed every 15 days. A $2000 invoice paid after 31 days, but before 45 days would cost $50. This is a little more complex than the fixed schedule, but depending on when your customers pay can offer you better overall pricing.
Prime +3% charged daily on net funds employed
In some factoring agreements, an interest rate can be charged as part of the fee structure. This is set up more like a bank or car loan would be. Coupled with an interest rate there is generally going to be some type of funding or administrative fee charged as well. The benefit of an interest rate is that it is generally charged daily, so a business won't see the same jump in fees with this structure as in a tiered or incremental fee structure if a customer pays late one cycle.
Upfront or due diligence fees are quite common in the factoring industry. Depending on the factoring company a business engages with, how large the transaction is and if there will be legal costs incurred, upfront fees can run the gamut. Many factoring companies don't charge any upfront fees at all and if there are legal costs involved the upfront fees can be thousands of dollars. These will generally be outlined in a proposal, so make sure that you read the whole proposal before you go ahead and sign it.
If a business owner is signing a factoring contract for a certain term or length of time, generally there will be a fee for terminating the contract before that date and without proper notice. Termination fees are generally calculated on the specific details of a transaction, so a business owner needs to make sure they understand what the termination fee will be if it becomes necessary to terminate the contract early.
There are a number of other fees that quite often will come up in factoring transactions and contracts that a business owner working with a factoring company should be aware of.
Administrative and funding fees are often coupled with an interest rate. They are typically expressed as a percentage of the invoice value that will be charged upon funding.
Wire and ACH fees are charged for the transfer of money from the factoring company to a business's account. Make sure to find out what the factoring provider you are looking to use charges for these transfers. Misdirected payment fees and missing notation fees are often built in to a factoring contract for the purpose of deterring fraud. If you see these in a factoring contract you are looking to sign, ask the factoring company about when these will come into play.
Minimum monthly fees are another type of fee that are quite common in factoring contracts, this is a protection to the factoring company in that, it gives them assurance that they are not going put all the work and cost into onboarding a new client and then not be utilized. With that though, a business owner needs to make sure that they are looking to factor enough receivables that the minimum monthly fee is not an additional burden.
At Meritus Capital we make sure to be transparent with our factoring fees. In most cases, we do not charge upfront fees, minimum monthly fees or administrative fees. We try to keep it as easy and clear as possible while setting up the fee structure in a way that the business owner likes and understands. If you have any further questions about factoring fees, feel free to reach out to us here at Meritus Capital anytime by email at firstname.lastname@example.org or call us toll-free at 1-877-648-3709. We have been providing factoring services to businesses across the U.S and Canada for almost 20 years!
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