Search for the term “factoring” online and you’ll inevitably find an article or two suggesting that factoring is expensive. The question to ask yourself is: compared to what?
If the article tries to compare factoring fees to loan interest rates, you can tell right away that they’re comparing apples to oranges. Factoring is not a loan, it is a sale.
In sales, discounts are a time-honored tradition, with sellers shaving a little off their price to sell more, or meet a specific cash flow target. It is customary, on large transactions, for businesses to offer customers an early-payment discount as an incentive to get them to pay sooner than the typical 30 or 60 days.
Companies that accept corporate debit and credit cards typically pay the credit card company a percentage of the sale as a fee for immediate access to cash for which they might otherwise wait for weeks.
Factoring works the same way. Terms vary, but typically a factor will buy an invoice and handle collection, at a fee comparable to the discount a seller would offer for any other early payment incentive.
Occasionally a banker, or an accountant, without much experience dealing with factors might fall victim to the “expensive” myth. But most refer clients to trusted factors, knowing that a quick cash infusion can often save a business, and preserve a valuable deposit customer, when the bank is unable to meet the customer’s need.