Flat Fee Factoring or Incremental Factoring Fee?
Flat fee factoring is when a factoring company and their client agree on a set, fixed fee for each invoice that the factoring company is going to factor that pays within 90 days. This can be great for many different companies as the client is agreeing to an exact fee or percentage (%) that makes sense for their business.
Here is an example (Flat Fee factoring):
ABC Trucking Company runs loads for their customer XYZ Manufacturing among other companies. They want to sell their invoices to a factoring company for cash flow. However, with their profit margins, they would only want to pay 3% flat fee no matter how long the customer takes to pay the invoices. This will still leave them with enough profit to make sense for their business.
Once they agree and sign a contract, the factoring company will advance the funds on their outstanding invoices. When the customer pays the invoices, no matter if it is in 7 days or 90 days, all ABC Trucking will pay is 3% flat fee.
This is a very predictable and safe way to sign up with a factoring company although it is not always the best way. Tiered factoring rates can be more cost effective in certain scenarios.
Let us run another example (Incremental Fee):
ABC Staffing provides clerical and administrative temporary staff to their customers. Most of their customers pay within 30 days and only a few pay later than that on occasion. ABC staffing needs to fund their payroll and want to use factoring as their solution. They are experiencing rapid growth and foresee it continuing and realize this solution is scalable and flexible.
But they need it to be cost effective as well. Most of their customers pay within 30 days.
ABC Staffing may opt for a tiered rate where the fee would incrementally increase as an invoice ages. Here is an example of what this fee structure could look like:
We see in this example that if the client's customers pay within 70-90 days, they may pay a slightly higher fee than in the above flat fee scenario. But for the majority of their customers that pay within 30 days, the tiered rates would save them almost 60% on each invoice.
This is why at Meritus we work with you to set up a fee structure that works best for your business! We want you to be comfortable and to easily understand exactly what you will be paying for our accounts receivable factoring services.