We get asked by business owners – why is the cost of invoice factoring higher than a typical institutional bank line of credit. Usually the first thing a borrower calculates is the discount fee multiplied by 12. Unfortunately this is a bad assumption.
When funding using invoice factoring the borrower does not get a loan for a year, instead they get funded for a month or so. This short term access to financing is due to the financial condition of the borrowers’ business. Meaning, their historical financing statements are not strong enough to secure annualized funding. Factoring companies take a larger risk but keep the borrower on a shorter leash.
The primary reason that a factoring company has to charge more for its financing is the heavy transaction load required to service the debt. Each invoice must clear a credit check of the account debtor (customer,) then the invoice is verified as due and owing, and then tracked for payment. It requires more staff, time and resources than a simple line of credit which is largely monitored by a bank computer once the loan is in place.
So even though factoring may seem to cost more in the short term, it is still a very handy tool for growing a business and the cost is relative to the ability to secure outside capital to grow to the next level.