Factoring can be a great tool to streamline your cash flow and grow your business as it eliminates the wait to get paid for owner-operators. However, some factoring companies have contracts with complicated jargon and disclaimers hidden in the fine print.
Sometimes a factoring company will advertise a great rate, far lower than any competitor. It’s a perfect scenario for you, right? Well, not exactly.
Those rates that seem too good to be true are typically just that. Although a low rate is can be great you always need to consider how the rate is structured and if there are associated fees that you will incur in addition to the rate can balloon the overall cost for you to factor.
Flat vs time-based rate
Flat rate is usually a single discount applied to the total value of your invoice. Say your flat rate is 3%. For a load that pays $1,000 you factor will charge $30 for their service regardless of when the broker will pay them.
Time-based rate depends of the days-to-pay on the invoice. It can be as low as 1% per week, but if your client pays in 30 days, or roughly 4 weeks, you will be charged 4%.
ACH or wire transfer fees can be issued each time you factor and range from $5 to upwards of $45 depending on the type of transfer or deposit. Transfering money via ACH normally takes 1-2 business days and usually costs up to $5. If you'd like to receive money the same day, the most common way is a wire transfer, but those are expensive, ranging from $25 to $50. If your load pays $1,000 a wire fees adds at least 2.5% to it. InstaPay makes same-day payments at no additional cost for you. Just something to consider.
Oftentimes a factoring company will require you to commit to factoring a minimum volume of invoices. Failure to meet the agreed minimum amount can result in extra fees or a percentage surcharge. Take into account your typical invoice amounts and calculate if you will have an issue trying to meet the minimum requirements. Keep in mind not all factoring companies have this policy or fee.
Some factoring companies charge you simply for signing up with them. They justify that as a way to offset underwriting and UCC filing costs. Signup fees if present usually range between $100 and $250. Don't forget to ask about them when you choose your factor.
Credit check fees
Although your credit is not taken into account, your client’s credit is. The creditworthiness of your client must meet a certain standard for certain factoring companies before they agree to factor your invoices. That’s right, some companies will charge you a fee for that credit check.
Most factoring companies offer annual contracts to factor. It’s important that you review and consider your options when choosing your factor. Contract terms usually come with termination fees and volume commitment.
Be sure to choose the best fit for you. If you’re confident that you won’t be factoring for an entire year or that you want to explore other options after a few months, you should consider factoring with a company that doesn’t have a minimum length of terms agreement.
Let’s say you have been factoring with a company for six months now. You have received payment days after hauling a load and it’s been beneficial in helping you generate cash quicker to cover your expenses. Now you have ample funds and decide that you don’t need to factor for the next few months.
The factoring company won’t let you out of the contract because you agreed to factor for a certain length of time. In order for you to stop factoring, you have to pay a fee up to $5,000.
To summarize, here's your list of things to ask about when you negotiate your factoring agreement:
- Is the rate flat per invoice or time-based?
- What transfer fees do you charge? If none, how fast do you pay?
- Do I have to factor all my loads with you? Do you require a minimum monthly volume?
- Do you have a contract term? If yes, what is the termination fee?
- Is there a signup fee?
- Do you charge for credit checks?
Now you can feel prepared to negotiate with a factoring company sales rep. But if you don't want to, keep in mind that InstaPay doesn't have any of these fees, charges a single flat rate and pays the same-day. You can sign up in 5 minutes and try it for free. If you don't like it, there is no pressure to stay – we have no contract term, no signup or termination fees. Doesn't hurt to try, does it?