‘Low rates!’ ‘Risk-free!’ ‘Fast cash!’ ‘No upfront fees!’ These are just a few of the phrases you see when you search for invoice factoring options. You might find a number of deals from factoring companies advertising low rates and quick cash flow. This sounds good on the surface, but there are often many details that aren’t disclosed up front.
All too often, factoring rates and deals that sound great at first end up being too good to be true. Many recourse factoring contracts come with fine print attached, putting you and your business on the hook for future risks. For example, when you sign a contract for recourse factoring, you assume the credit risk of the broker or shipper you are hauling for. This means you’re essentially gambling on the reliability of the factoring company, with no guarantees they’ll collect on your invoice. But because you’re locked into a contract on their terms, those unpaid invoices will again become your responsibility after the terms of the agreement expire (usually 60 to 90 days).
Understanding the Nitty Gritty Details
A lot of factoring companies advertise super low rates to get more customers, but they don’t always clarify the details. For example, did you know there are many ways for those ‘lower rates’ to change? Typically, the lower rate is introductory and only good for a certain number of days. After that, the rate will rise incrementally, sometimes even daily – yikes! Also, after an additional number of days, you must use your hard-earned cash and buy the delinquent invoice back from the factoring company. Talk about an unpleasant surprise!
And there’s more. With some of these ‘low rate’ deals, you’re also locked into a contract of one or two years. These contracts are very difficult and sometimes very expensive to get out of. Unfortunately, such long-term agreements are hard to detect up front, because the contracts are so extensive and filled with confusing terms. As a result, you may not realize the full extent of what you’re accountable for.
Knowing the Bottom Line
When it comes to maintaining cash flow, factoring invoices at a good rate is a useful financial tool. However, since your main concern is the long-term health of your business, you want to avoid taking on unnecessary risk. To avoid damaging your business over time, consider non-recourse factoring with clear and reasonable rates, where you don’t become responsible for invoices that go unpaid. While non-recourse rates may be a bit higher up front, you’ll avoid a lot of headaches, hidden fees and long-standing contracts – and that saves you money and hassle over the long haul.