26th August 2022

It's easy to see why invoice factoring might be a tempting solution for small businesses in need of a quick cash injection. It eliminates the need to apply for bank loans and instead of having to put up valuable assets as collateral, you can simply leverage your invoices.

Yet, one looming question remains: Does the benefit truly outweigh the cost of factoring?

What is Invoice Factoring?

Invoice factoring is the practice of selling your invoices or accounts receivable to a third party, known as a “factor”, at a discounted rate. At face value, this might seem like a quick and easy way to improve your cash flow. However, the jury’s still out on whether factoring can provide a viable long term solution.

The Underlying Cost of Factoring

The average cost of factoring invoices is usually between 1% and 5%. The greater the risk taken on by the factor, the higher the factoring fee. Other considerations include the volume of invoices and the duration it takes for your customers to pay.

You will usually be paid in two instalments.

  1. The moment you invoice a client, you will receive between 70% to 90% of the invoice amount. At this point, a service fee will be deducted from your account.
  2. The remaining funds will be held by the factoring company until they receive payment from your customers.

What many companies fail to consider is the total cost of service in addition to the deceivingly low rates offered by factoring companies. One such aspect is the late fees. The later your customers pay, the more you will be charged. To add insult to injury, these late fees increase exponentially with each passing day. For recourse factoring where you are still held liable for your customers' debts, you will have to buy back any unpaid invoices from your factors, leaving you worse off than when you first started.

Another downside that often gets overlooked is the impact on customer relationships. Most factoring companies will contact your customers once you have sold your invoices. Some customers would inevitably view this as a sign of a floundering company and begin looking for a way out. Working with a factoring company that engages in intimidating collection tactics can cause irreparable damage to not only your customer relations but also your company’s image and reputation.

Adapting with the Changing Times

The case against factoring is manifold. Yet, companies continue to seek out factoring companies instead of looking for cheaper, less drastic alternatives simply because it has been the go-to cash flow solution for centuries. In fact, it is widely accepted that the concept of factoring dates back to ancient Rome. Suffice it to say, the advancement of technology since then has provided companies with more sophisticated options. The corporate credit card in particular, is well on its way to becoming the preferred payment option for an increasing number of business owners.

Enabling Credit Card Payments in the B2B Sphere

Winner of Deloitte's Most Disruptive Innovation Award, Billhop has been making waves in the B2B payment sphere. By combining existing credit card rails with proprietary technology, Billhop aims to address the low card acceptance rates within the B2B sector. As it stands, there is $120 trillion worth of untapped cash for the sole reason that most vendors do not accept card payments.

While unfortunate, it is easy to see where these vendors are coming from. Accepting credit cards comes with high processing fees and involves countless moving parts in order to fully integrate the system into their account receivable process.

Billhop: The One Stop Card Payment Service

As a premier payment service, Billhop allows you to pay any bill and invoice with your preferred credit card to non-card accepting suppliers.

Unlike factors, Billhop does not charge any hidden or recurring fees. You only have to pay a one time service fee of 2.95% of your transaction amount. This fee can often be offset by early bird discounts and cashback rewards from your credit card. You can comfortably increase your liquidity without resorting to factoring.

Alongside that, paying suppliers with credit cards can enhance your company's accounting and record keeping processes as cards offer comprehensive remittance data. On top of being considerably cheaper than factoring, you can consolidate your invoices into a single billing cycle when you pay by credit card.

Ditch high factoring costs and leverage your credit card float with Billhop today!

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Billhop AB is a Swedish payment institute, authorised and regulated in Sweden by the Swedish Financial Supervisory Authority. We are exempt from the prohibition, in regulation 138 of the UK Payment Services Regulations 2017, on providing payment services in the United Kingdom and we are not authorised by the UK Financial Conduct Authority. Billhop upholds industry best-in-class security standards including 2FA and issuer security solutions such as 3DS. All client funds are safeguarded through standard client funds account setup.