Incredibly, there are accountants that want to take the 3% and somehow come up with an interest rate based on when the client (account debtor) paid the invoice to the factoring company and has absolutely nothing to do with the invoice factoring cost the business owner is paying. If the business sells one invoice a year, the fee is still 3% based on the invoice value.
If the business sells once a month an invoice for a 3% fee, its 3% of the invoice amount. For example, if your factoring agreement says you will sell the invoice at a discounted 3% flat fee, and receive 97% for the sale of your invoices then its 3% regardless. Invoice Factoring cost is not an interest rate! The transaction is a buyer/seller agreement whereas the business owner sells an invoice at an agreed upon discounted price. This is a great option for the business because it can sell its invoices and pay for a fee only when needed. Factoring companies often will accept an agreement whereas the business owner can offer only specific accounts to submit for funding and is not required to factor all of the invoices. This eliminates the waiting time and will give the business a consistent, reliable cash flow solution on the invoices it needs early payments on. The solution is to stop offering early payment terms to customers and just get an invoice factoring company. Some account debtors just don’t have the man power to pay an invoice within 10 days to take advantage of the early payment discount. The problem is that even with substantial savings, customers prefer to take the longer credit terms offer and leverage on the line of credit offered by the business/vendor. It’s a very common practice now for a business to offer some type of financial incentive to pay an invoice earlier than the terms. I recently paid an invoice for a doctor’s visit online and it offered a substantial discount for paying before a certain date. The reality is that early payment terms offered to customers have existed for many years since credit terms have been offered in business transactions and now has extended to consumer transactions.
Invoice Factoring Companies Provide 24 hour Early Payment on your Invoice for a Discount Fee. Very few customers seldom take advantage of an early payment discount and leaves the vendor struggling for cash. Wait a minute, are there customers out there that would take a 1% to 4% discount if they paid their invoice within a 24 hour period or the same day? I have never seen a customer take this opportunity and more often the standard early payment discount terms to an account debtor is “Net 30 days 2% net 10”. Think of it as an early payment discount you would offer a customer (account debtor) if they paid their invoice within 24 hours or the same day. The simple answer is you are giving up between 1% to 4% of the invoice value depending on many variables.
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