When choosing a factoring agency, businesses should consider upfront payment, factoring fees, and termination terms. Most agencies offer an upfront disbursement of 80-90% of the total invoice value, with fees ranging from 3-6%. Termination usually requires 30 days’ notice and repurchasing of outstanding invoices.
When invoice financing or factoring appears to be the best means of generating cash to keep a business going, company officials are faced with the task of finding the right factoring agency to do their job. While all factoring agencies offer the service of effectively purchasing a business’ current accounts receivable and providing a business with the face value of those invoices upfront, there is some difference in the terms and conditions applied by different providers. This means that before signing with any factoring agency, it’s important to evaluate the program in terms of how much money is up front on the front end, the amount that is kept as factoring fees for the service, and what it takes to end the relationship. once the business no longer needs to factor in its invoices to stay afloat.
In general, a factoring agency will evaluate, approve and purchase a batch of invoices relating to a specific billing period. Once purchased, most agencies will provide an upfront disbursement of 80% to 90% of the total face value of the invoices. The goal is to identify factoring services that offer a higher upfront outlay, allowing the business to better leverage cash flow at the front end.
Another consideration is how much the factoring agency takes for factoring fees. Typically, this is also a percentage of the face value of billed invoices. Commissions can vary between 3% and 6%. Once all or most of the invoices in a given batch have been paid in full by the debtor’s customers, any balance remaining after prepayment and fees are posted is forwarded to the debtor. The idea is to combine the best possible upfront payment with the lowest possible factoring fees, a move that allows the company to ultimately collect the largest amount of return from invoices while having the most upfront funds to use in the handling outstanding debts and running the business.
One element that is often overlooked when evaluating a factoring agency is what the debtor must do to end the factoring relationship. Typically, this will involve notifying the factoring partner at least thirty days in advance, and will also result in the repurchase of any purchased invoices that have not yet been settled. In some cases, the factoring agency will allow the relationship to be terminated if the total value of any remaining invoices is less than a certain amount and if the debtor agrees to buy back those invoices within 90 days of termination of the agreement, if payments from debtor customers are not received in the meantime. Here, the goal is to get the most liberal terms for ending the factoring relationship while still enjoying the best disbursement plan and lowest possible factoring fees.
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