Specialty lenders often use the terms Accounts Receivable Financing and Factoring interchangeably. At altLINE, we purposefully differentiate between the two with distinct structures. Whatever a lender may call it, there are certain things to keep in mind when evaluating options.
How are Accounts Receivable Financing Rates Determined?
Similar to other A/R based lines, your Accounts Receivable Financing rates will be impacted by:
The Size of the Borrowing Need:
The more money being borrowed, the easier it is for the lender to recoup fixed costs associated with the line. This results in a lower all in rate.
Average Days Sales Outstanding:
This is simply a more complicated way of saying “how long it takes for a business to get paid.” The longer the conversion cycle from invoice to cash, the bigger the impact on the service fee.
The Credit Quality of the Customer Base:
Businesses whose customers have stronger credit profiles typically benefit in the form of lower rates. Customers with poor credit may prevent your business from getting approved for invoice factoring.
Accounts Receivable Financing Fee Structures:
At altLINE, there are two primary costs associated with our Accounts Receivable Financing program. These include the service fee and the interest rate.
The service fee is stated as a percentage and is applied to the face value of the invoice that’s being processed. Once an invoice is processed, the advanced portion of funds are made available for a client to borrow against.
The second component of the fee structure is the interest rate. Like a traditional line of credit, interest is only charged when funds are borrowed from the pool of invoices that have been processed. This interest is accrued over the month and paid at the end of each month from the inflow of payments from customers.