Last Updated on August 26, 2021
No one likes to pay too much for a product or service, which is why we all shop and compare when we buy just about anything. But, when it comes to certain types of business services, you typically get what you pay for, which can end up costing you much more in many ways. You don’t want the cheapest or least experienced accountant working on your taxes because it could cause you lots of problems down the road.
There’s nothing more important to a business than its cash flow, so when a cash crunch occurs, you want a factoring company that’s experienced, efficient, and ethical.
While that may cost a bit more, it would be important to compare it to the potential costs of working with a “cheaper” factoring company.
Ways You Pay More for a “Cheaper” Factoring Company
During this time of business expansion, factoring companies have proliferated and with all the new entrants in the industry, it has become highly competitive. Newer and less experienced factoring companies have to compete by offering lower factoring fees. But, because they can’t survive on lower fees, they have to layer on additional, often hidden, fees. So, while you may pay a half or full point less in factoring fees, you are likely to be hit with additional fees such as:
- Application and processing fees
- Origination fees
- ACH transfer fees
- Credit check (on your customers) fees
These fees are typically buried in the contract so they are not so obvious, but they can add up. The fine print may also contain some backdoor fees that can be very costly, including minimum volume fees, termination fees, and float cost.
Minimum Volume Fee
Some factoring companies may charge a low fee but then require you to factor a minimum volume of invoices. If you don’t meet the minimum volume requirement, you can be charged additional fees of a percentage surcharge.
Some factoring companies require a time commitment of three to 12 months. So, even if you don’t need to continue to factor invoices, the factoring company won’t let you out of the contract until the time commitment has been met. You could end up paying $1,000 to get out of the contract.
When a customer pays a factored invoice, it can take a period of time for the money to clear in the factoring company’s account. During this period of time, the factoring company continues to accrue interest on the outstanding amount. To cover their interest costs, factoring companies typically add three to five days of float to the invoice term. The problem is, an extra day or three added to the invoice term can increase your factoring costs substantially.
Some factoring companies are bank-owned or affiliated, which means there is minimal float. Because they have direct fund access, funds are transferred more quickly on both ends of the transaction, saving all parties time and money.
The Cost of Poor Service
Far worse than additional money costs is the potential cost of losing a valued customer. When you factor an invoice, the factoring company essentially becomes your representative when collecting payment. Cheaper factoring companies may not be able to pay for well-trained, quality staff to interact with your customers. Customers could perceive a poor interaction with a factoring company as a sign of trouble. It could certainly hurt your business’s reputation. The best invoice factoring services take ownership of your success and strive to conduct themselves professionally and conscientiously.
“Cheap” is Never Cheap
Quality factoring companies may charge a slightly higher factoring fee, but they are completely transparent with their customers. Generally, they don’t layer on fees and, if there are any additional fees, they are disclosed upfront.
Factoring companies that are bank-owned or affiliated have direct access to funds so they don’t incur any interest costs that must be passed on to their customers. Because they transact within their bank, you have quicker access to cash when you need it and you are credited more quickly when your customer pays the invoice.
And, when it comes to customer service, you almost always get what you pay for. Factoring companies that are more established are usually more experienced with customer interactions, always striving to make their business clients look good.
When your cash flow, bottom line, and customer relationships are at stake, it just doesn’t pay to go cheap.
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.