Factoring - The Staggered Fee Structure

Factoring is a godsend for many businesses, particularly when there is a credit freeze going on like the current on. The key to making factoring really work for you is to deduce how the fee structure works and whether it will work well for you.

Factoring is simply the sale of some or all of the outstanding invoices you have for customers. Why would someone sell their invoices? The primary reason has to do with cash flow. Many businesses are profitable, but still have problems making payments on bills because they have to wait for invoices to be paid. Consider a quick example that many businesses run into.

I own a company making locks for briefcases. I sell them to one of the dominant briefcase brands, which means I have steady work. The only problem is the company pays net 30 on the invoices. This is an issue because I have to pay my employees every two weeks and I often do not have enough money on hand to meet payroll obligations regardless of the fact that I am profitable.

To address this situation, I would simply factor these invoices. The factoring company would evaluate whether my customer is a good risk. Since they are a leading brand, the factoring company would approve my application and give me a large percentage of the invoice. The exact amount would have to wait to be determined because of a staggered fee structure.

Time is money. The factoring company is going to charge you based on the time it takes to collect the money from your customer. Here's how it works. The factoring company will pay you roughly 70 percent of the invoice amount. It will hold the remaining 30 percent in escrow. It will issue you a staggered percentage fee rate that goes up as certain deadlines are passed. Don't worry. You get to approve it before hand. Let's look at our example above again.

I decide to sell my briefcase invoices to a factoring company. The company agrees to buy them in exchange for the following staggered fee agreement. The company will give me 70 percent immediately. It will then charge a 1.5 percent fee if the customer pays on or before 30 days. The percent will go up to 2.5 percent if the customer pays between 31 and 45 days out. The percent then goes up to 4 percent if the client takes 46 to 60 days. The percentage will continue to go up in this staggered manner until a final date.

As you are undoubtedly thinking, the key to using factoring effectively is to know the payment habits of the customer in question and then match them to a fee structure that is acceptable to you. Fee structures are not set in stone, so feel free to try to negotiate a better deal. The factoring company will often refuse, but it can't hurt.

Stephen Teak writes about factoring for FactoringCompanyInformation.com - sell your invoices for quick cash today!

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