Factoring is a financial service that involves the selling of accounts receivable by a business to a third party, called a factor. The factor then provides the business with a cash advance based on the value of the invoices. The fees involved in factoring include:
- Factoring fee: The factor charges a factoring fee, which is typically a percentage of the invoice value, to cover the costs of administering the factoring process.
- Interest fee: The factor may charge interest on the cash advance provided to the business until the invoices are paid by the customers.
- Credit check fee: The factor may charge a fee for checking the creditworthiness of the business’s customers, as this determines the risk involved in the factoring arrangement.
- Reserve fee: The factor may hold back a percentage of the invoice value as a reserve, which is released to the business once the customer pays the invoice in full.
- Collection fee: The factor may charge a fee for collecting the payment from the customers, which is deducted from the cash advance provided to the business.
The fees involved in factoring can vary depending on the type of factoring arrangement and the creditworthiness of the business’s customers. It is important for businesses to carefully consider the costs and benefits of factoring before entering into a factoring arrangement.