Various business leaders across the world, if given the chance, would sell their receivables in exchange for hard cash payment today. The only concern small business owners have is the accounts receivable factoring fees involved in the transaction, which is tagged to each transaction and can be rather large.
Receivable factoring companies, also called factors, or factor companies, are those that are in the business of procuring receivables and invoices from businesses in return for cash payment today. When this is done, the accounts receivable factoring company takes the potential risk of default by the customer. Now to mitigate damage from that risk, factoring companies charge a discount fee, often also called a haircut or a commission each time they buy an invoice or a receivable.
That is not the only fee charged by accounts receivable factoring companies. Accounts receivable factoring companies also charge a one-time set up fee when it evaluates the small business because it wants to understand how the receivables were generated, as well as the nature of the customer and their risk profile.
Accounts receivable factoring rates can be as low as 1% and as high as 5% and even more these days. However, most accounts receivable factoring companies try to keep this number in the 3% range. At 3%, factoring invoices and receivables is fairly affordable for a small business. 5% or more is a whole different ball game if you ask me.
What about the one-time set up fees? I cannot really comment on those because those have a very broad spectrum in which they fit. Many accounts receivable factoring companies waive those fees in order to win the small business over.
Those are the only two fees involved essentially in accounts receivable factoring transactions. I hope you learned something useful that you can apply to your business today, or share with someone you know who can apply it and help raise the cash they need for their business.
Read about accounts receivable factoring rates here. Also read about SEP IRA rules here.