The Costs of Business Invoice Factoring

Invoice factoringThe factor charges a discount or fee usually between 1.5 and 3.0 percent of the invoice value. The cost of factoring can be compared to the discount rate many companies offer their credit customers to entice them to pay C.O.D.

The following are some of the factors considered in the determination of rates:

  1. Total dollar amount of factored invoices.
  2. Average invoice dollar amount.
  3. Invoice turn (anticipated average) and actual turn.
  4. Creditworthiness of customer base.
  5. Length of factoring contract.
  6. Minimum commitment of invoices to be factored.
  7. Advanced percentage ( contracted and actual).
  8. Reserve percentage (contracted and actual).
  9. Rate of factored to non-factored invoices.
  10. Existence or non-existence of outside collateral in addition to receivables.
  11. Financial health of client and guarantors.
  12. Historical dilution ( non-payment due to claims disputes, adjustments) and actual dilution.
  13. The Factoring Process

    The following is a step-by-step explanation of the factoring process, from the application through the first funding for a Client with USA domestic customers:

    1. Factor and Client discuss factoring as it relates to Client’s business.
    2. Factor reviews Client’s customers and basic Client information.
    3. Factor prepares a Proposal outlining all lending terms.
    4. Factor and Client review Proposal.
    5. Client accepts Proposal.
    6. Client gathers balance of due-diligence information.
    7. Factor reviews balance of due-diligence information and prepares lending documents with assistance from counsel.
    8. Factor and Client review lending documents with assistance from counsel, if necessary.
    9. Client executes lending documents and returns with AR for first funding.
    10. Factor reviews executed documents, and files a UCC-1.
    11. Factor verifies AR and provides notification to Clients customer’s regarding future payments going to Factor’s lock box.
    12. Factor advances funds according to the terms contracted.
    13. All the above steps can be accomplished within two weeks. After the first funding, each additional funding can be completed in one or two days, depending on verification of the AR.

      Factoring Cycle by the Numbers

      The following example is based on a $100,000.00 USD invoice that is paid in 47 days.

      1. Day 1 – New invoice(s) and backup submitted by Client to Factor for purchase via email.
      2. Day 1, or 2 – Factor verifies invoice(s), by telephone, checking to make sure the goods or services have been received.
      3. Day 3 or 4 – Factor advances (wires) money, up to 80%, $80,000.00 USD.
      4. Day 47 – Client’s customer pays $100,000.00 to Factor’s lock box by check or by wire directly into Factor’s bank account.
      5. Day 47 – The payment is processed, factoring fee deducted.
      6. Day 54 – Balance of reserve, the 20% ($20,000.00) of the invoice that was not advanced, less factoring fee is wired to Client’s account.
      7. In short, a factor can help turn opportunities into realities for growing businesses.

        About PBCC

        Pacific Business Capital Corporation is an accounts receivable financing company based in Costa Mesa, CA. The company provides fast and efficient receivable factoring and other asset based lending programs to many clients across the United States.

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