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Extra Factoring Fees and How to Avoid Them

Extra Factoring Fees and How to Avoid Them

Factoring is a form of asset-based financing that allows a company to sell its accounts receivable to an outside company at a discount. The outside company then collects the outstanding balance.

When invoices are factored, companies offer a discount on the value of the asset then cost is added depending on the length of time it takes for the invoice to be paid. The cost generally depends on the discount rate, fees and amount of time it takes customers to pay balances.


When calculating fees, most factoring companies use one of two methods: the Flat Discount method or the Prime Plus method.
The discount method charges a flat percentage rate on the invoice for the first 30 days and an additional percentage, usually 1 percent for every 30 days it’s past due.


Prime Plus is based on the Prime Rate, or the short-term interest rate set by the Federal Reserve. The Prime Rate is used by U.S. banks as a reference rate for setting interest rate for a variety of loans, including mortgage, small business and even credit cards. As of April, the Prime Rate is 4 percent, according to the Federal Reserve Bank.


Most larger factoring companies use a combination of the prime rate plus an annual interest rate to set their discount rates. This makes their rates variable over time.
The Prime Pus Method encompasses two fees. Called a factoring fee, the first is a one-time fee assessed per the gross amount of the invoice. The second fee is the monthly interest charged on the advance.


Both methods result in a promised factoring fee of around 5 percent.
But, what many companies don’t tell you is they charge hidden fees that can increase the factoring fee to more than 10 percent.
At Pay It Forward, factoring fees are guaranteed to never go beyond 5 percent.


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