Controlling your accounts receivable factoring costs is based on three main components – the time it takes to collect invoices, the volume of invoices factored, and the creditworthiness of your customers. Each of these issues is important in establishing how much you will pay to factor your invoices, but there are ways to control your costs.
Part of the financial risk that incurs when purchasing an account receivable is related to the time it takes for a bill to be paid. Time is therefore an important commodity that can affect your fee: the longer an invoice is outstanding, the higher the fee. (A 60-day invoice would consequently cost more than a 30-day invoice.) You can reduce your time-related costs in two key ways: 1) Factor customers that pay their bills quickly. 2) Send invoices only when you absolutely need money. By retaining your invoices for a while after you provide the services/goods to your customer, you will decrease the amount of time a factoring company owns the account receivable, which will decrease your fee.
Volume refers to the total amount of money that is factored each month. Opposite from time, higher volume means lower fees, while lower volume means higher fees. Eventually, you can lower your fees by factoring larger dollar amounts and larger invoices. Also, long-term relationships that result in factoring large cumulative dollars can result in lower fees AR 10 80 Lower Receiver.
Unlike a bank loan, the ability to factor is dependent on your customer’s creditworthiness, not your own. Therefore, the factoring company is assuming risk based on your customer’s credit history, which affects your fee; marginal credit means higher fees, while good credit means lower fees. The most straightforward way to decrease your fee is to factor invoices due from customers with good credit history. While most factoring companies will only factor customers who have acceptable credit, those who have better credit will be less expensive. While other variables can affect the factoring fee, time, volume and credit are the most significant components that a factoring company will evaluate. By carefully using accounts receivable factoring services you can minimize your costs.