Understanding Accounts Receivable Factoring Rates   by Curt Matsen

in Finance    (submitted 2011-05-17)

Accounts receivable factoring rates are quite easy to understand, however it is important to understand different parameters and their scope of influence on the rates you will be paying to your chosen factoring company.

Accounts receivable means granting additional capital necessary for businesses both for continuing their day to day business activities and expanding their business until they realize due payment from their customers. Factoring is thus a special class of making industrial and business credit available to businesses in need of short term working capital, though in a manner different from banks and non-banking financial institutions that - even though more inexpensive - like to provide loans on a long term basis upon a lot of enquiry and documentation.

“Accounts receivable factoring rates” is a relatively simple concept in business funding provided you are aware of the components it is constituted of, and that have a bearing on the fees to be paid to a factoring company.

Besides a fixed component to be paid, there is a variable component as well that is levied upon every transaction based on the number of transactions made, and not transaction value. Hence it is a wise decision to outsource fewer but high value bills to get lower accounts receivable factoring rates.

Types of billings – Which one to go for?

Generally two kinds of billings are possible - progressive billing and non-progressive billing. In progressive billing, the factoring company charges you on a continual basis as and when bills are produced. Because the number of bills produced can be high, this may eventually turn out to be an expensive option. It is generally better to negotiate the billing mechanism at the time of entering into a contract.

Non-progressive billing is a more popular option where a factoring company charges you and your clients only once. The costs are definitely lower as it is also an easier option for the factoring company. So everybody benefits with this approach. However, this option may not be wise to go for in case your customer pays you in several installments.

For payments through installments, it is wiser to stick to the progressive billing structure. As pointed out above, progressive billing involves spending more resources, effort, energy and time and requires closer communication between you and your factoring company.

Generally the first step towards a contractual agreement between you and such company is to create a new account with the accounts receivable factoring company that requires effort, resources and time; and usually involves review of credit standings of all parties concerned, background checks, reference verification, study of your and your clients’ businesses, etc. Accounts receivable factoring rates can then be negotiated.

Factoring companies usually levy a fee – ranging from $500 to several thousands – to open your account and process your application towards accounts receivable factoring. These numbers may look intimidating on your computer screen, but they are a small price to pay considering benefits your business would reap from the services.

About the Author

Curt Matsen, CPA is an entrepreneur who explains accounts receivable factoring rates in detail for a better understanding. He started and grew a successful business using various accounts receivable factoring strategies. His website helps entrepreneurs accelerate cash flows and secure the capital they needed to grow their businesses.