Many business owners wonder why the cost of invoice factoring is higher than a typical conventional line of credit. Usually the first thing the uninitiated will do is calculate the monthly discount fee multiplied by 12. Unfortunately this is a bad assumption. When utilizing accounts receivable financing the borrower does not get funded for a year, they get funded for a month. This short term access to financing is due to the financial condition of the borrowers business. In other words, it is 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 get the account debtor’s (customer) credit checked, then verified as due and owing, then tracked for payment. It requires more staff, more time and resources than a simple line of credit which is largely overseen by a bank’s computer.
So even though factoring may seem to cost more in the short term, it is still a very handy tool for growing a business