Invoices factoring or AR Financing is a great way to increase cash flow while not incurring additional debt. You get paid immediately for invoices instead of waiting 30-60 days for payment from your customer. But how much does it cost? That is the all-important question.
Many people believe factoring is very expensive and only done when your cash flow is in a pinch. In reality, factoring can be an excellent tool to improve cash flow and the rates are usually between 1 and 5%. Think of it as offering a slight discount to your customer for paying quickly. Factoring is very similar in that way.
The actual cost of factoring is typically 1% of the invoiced amount every 7-10 days. So for example, if your invoice is $1,000 at a net 30 payment agreement you will pay 4-5%. The fee or discount will be $40 or $50 dollars. That isn’t too bad when you received 85% of your $1,000 invoice immediately.
Is invoice factoring for you? Is paying a small fee or discount worth having a steady cash flow? Most small business owners agree it is worth the peace of mind knowing payroll and bills will be paid.