The Basic Price
The cost of factoring large invoices by large companies is comparable to conventional bank financing. However, for smaller companies and invoices, the price typically ranges between a discount of 2% to 4% per month of the invoice amount. Thus, on average that's equivalent to an APR of 36%.
Invoices are expensive to finance because they aren't a secure form of collateral like a vehicle or a house. Also, there's far more potential for fraud to occur with invoice financing.
The Advance Percentage
Fuller Business Funding typically advances 90% of the invoice value and reserves 10%. Thus, if you decide to factor a $1,000 invoice, we would deposit $900 into your bank account within a day. You keep the entire advance until your customer pays. After your customer pays, and we recover our advance plus a fee, you get a rebate for the balance.
In contrast, if you borrow against a $1,000 invoice with Fundbox, they will deposit 100% of that amount into your bank account. However, every week after, Fundbox will automatically withdraw 1/12th of that amount (plus a finance charge) from your bank account, until the invoice loan is repaid. Thus, after a few weeks that initial $1,000 advance gets reduced to a balance of less than $740. Also, if the loan continues much longer, that leaves you with less and less money to work with, until your customer pays the invoice. If your customers typically pay what you've billed them within a month or so, Fundbox withdrawing money from your bank account every week may not be a problem. After 6 weeks though, those withdrawals leave you with only about $500 of the initial advance. In contrast, with invoice factoring you'd still have the full $900 advance.
If your business credit needs are minimal, we recommend using Fundbox for invoice loans. The speed and ease of using the Fundbox platform can't be beat. However, if your business needs at least a $50,000 line of credit, invoice factoring may work better than using Fundbox. Also, if your business has credit needs exceeding $100,000, invoice factoring may be the only reasonably priced financing available to you. That's because most of the unsecured business loans offered on the internet are extremely expensive.
The combination of the discount and the advance percentage constitutes the price of factoring. To determine a price, we look at a number of variables, such as how well your customers pay, the average invoice size, sales volume, etc.
All else being equal, the smaller the average invoice size and volume factored, the higher the price. Also, the lower the credit risk, the lower the price. And vice versa. Over time our policy is to gradually lower the price for our valued clients.
When shopping for invoice financing, you should consider if there are any additional fees--hidden or otherwise. Our fees are simple and transparent. We typically charge a fee of 1/10th of 1% per day of the invoice value. Thus, on a $1,000 invoice, our fee would be $1 per day. Also, our minimum fee to factor an invoice is $5. Because of that minimum, factoring invoices under $100 may not be worth the expense.
Beware! The true cost of alternative business loans over the internet may be impossible to calculate ahead of time. Only in hindsight can the actual price be determined. The real cost for many of these loans can exceed an APR of 100%. Instead of being helpful, a series of such high-priced loans may more likely contribute to the failure of a business.
Your situation is unique. To find out whether invoice factoring may or may not be a good fit for your business, please call Fuller Business Funding at 541-484-7044.