Invoice factoring is a simple process that is slowly replacing bank loans. In this process, businessmen are required to sell their invoices to these companies at affordable rates in exchange for cash upfront. This enables businesses to get their much-needed funds and hence operate normally, without having to worry about any customer’s delayed payment. Many companies are now taking more and more advantage of this factoring process. Media companies, government contractors, advertisers, staffing companies and every other company prefer this method.
How Invoice Factoring Works?
The process begins with a simple transaction when a business sells its invoices for the first time to a factoring company. The factoring fee charged is extremely minimal which is why businesses find it an extremely preferable option. The company would demand a small reserve between 5 to 30 % of the total invoice value that customers haven’t paid yet. This is charged to that the company can protect against the losses.
The Costs of Invoice Factoring
There are various factors on which the discount rate depends on. Some of them are:
- The Discount Rate
Usually, the amount of charged ranges from 1 to 6% every month. Depending on this factor, the rate might be accrued on a weekly, daily, or monthly basis. The more your customers delay to clear the invoices, the more factoring fee would you need to pay. Also, the fee becomes more if the risks associated with the transactions is high. If your customers aren’t reliable or professionals, you might have to incur high fees.
- Other Common Fees
Apart from the discount rate, other factors are taken into consideration. They are as follows:
Application fee: A certain amount of fee would be charged to examining your application and setting up the necessary arrangements.
Diligence fee: This is also called a setup fee. This is the second category of the upfront fee. It’s charged to perform credit checks and other things to open an account.
Maintenance fees: Also called administration or servicing fees, this is a catch-all fee that covers any or all costs associated with keeping your current updated.
When you are looking for a factoring company, choose one that you can trust. Not only that, make sure it offers suitable terms and conditions which are flexible and convenient. If you are unsure about which one to choose, you can discuss with an invoice factoring broker Singapore.