Invoice Factoring Float: What Is It?

A business that has a large volume of outstanding invoices is in deep trouble. They don’t really have the money on-hand that they can use to expand their business, pay off their loans, and all other business transactions.

If your business is in this position, it’s time that you consider using the services of a factoring company. A factoring company is basically a financier that “buys” your legitimate invoices. They immediately give 70% to 80% of the total collectible amount, and take care of the actual debt collection process. They receive payments from your customers directly, deduct their fees from that amount, and then give you the remainder to complete the invoice factoring transaction.

With this in mind, it’s important that you adjust the prices of your products and services if you plan on using a factoring company for invoice management. Using the services of a factoring can cost you up to 5% of your revenue.

What Is Float?

Anyone who has tried making payments online or through bank-to-bank transactions should know that the amount sent is not automatically credited to the receiver’s account. The bank still requires a period for clearing. For some banks it’s three days, for others it’s seven days. The clearing period also varies based on the amount sent. The same happens with regards to invoice factoring. When a customer pays, it takes a few days for that payment to be reflected on the business owner’s account. This waiting period is what we refer to as ‘float.’

Why Is Float Relevant?

Float is not really that problematic when you and your factoring company agree that that financing fee is going to be fixed, regardless of how valuable or old the invoice is. However, if the fee gets larger as the invoice ages, this is where your problems start. Let’s say that a factoring company charges 1.5% for an invoice that is 16 to 30 days old and 2.5% for an invoice that is 31 to 45 days old. Let’s assume further that the allowed float period is three days.

Now, if a customer pays on day 28, given the three day float, their payment will only be officially acknowledged as received on day 31. The three-day delay easily put the invoice in a much more expensive tier (2.5%). If this happens too frequently, this can bring up to 40% increases in annual financing costs.

What can be done?

The number of float days is usually stipulated in factoring contracts, though agents working for factoring companies rarely discuss it. Be sure that you fully know the terms before you sign anything. If possible, negotiate with your factoring company to decrease the number of float days.

It will be a lot better if you are able to find a factoring company that does not consider float days at all. Dealing with them will be much cheaper and less prone to conflicts. Float days, no matter how short, will always be prone to being abused by factoring companies to increase the fees that they are to get from you. Some debtors will only pay when asked. The factoring companies can always ask these debtors on borderline days (similar to the example above), and just let float do its work.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes