So, how do you use invoice factoring correctly so that it isn’t too expensive for your business? Each factoring company uses a complex algorithm to determine how much an invoice is worth to them. At the end of the day, however, the more collectible an invoice is, the more an invoice factoring company is willing to pay for it. When businesses are just getting started with factoring, every invoice represents a high risk to the factoring company because there is no collections history with that particular customer. However, if the same customers’ invoices are factored every month and they pay on time, these invoices represent a diminished risk and therefore the factor is willing to pay more, reducing your cost. Those companies that don’t factor every month don’t get to take advantage of this reduced cost and will therefore pay a higher premium every time they factor.
How Universal Funding differs from a lot of other factoring companies is that when they create a package for you, they assess who your debtors are, determine their credit risk, and check payment cycles. With all of this information they determine the lowest rate possible for your entire factoring package so that you know your rate will always be the same. It will not change from invoice to invoice.
In addition, invoice factoring represents an unlimited access to cash whereas a traditional line of credit places limits on your ability to get the cash you need. A credit line is based on your company’s existing assets. A bank will allow you to draw on this line of credit until you reach your assigned credit limit. With invoice factoring, you have access to cash as long as you have open invoices to sell. This means the more sales you make, the more cash you can advance on allowing you the ability to expand your business exponentially, which is much more valuable than the difference between factoring premiums and bank interest rates.
To see if you can get better rates with factoring than you can with the bank give us a call to day at 1-800-405-6035 or submit a rate form form to get started.