Did you know that credit cards are basically a form of invoice factoring? It’s true!
When a merchant is willing to accept credit cards – they are giving up a small percentage of the proceeds of each sale or “invoice” to get paid immediately vs. waiting for payment.
I’ll explain further – when you have a trucking company that ships a load for someone – they often use a factoring company which buys the invoice for a discount. Sometimes this discount is for 95% of the value – so the trucking company gives up 5% so they don’t have to be the bill collector and charge late fees or interest.
Compare this to the following:
If you have a shop that sells shoes. You sign up for a credit card merchant account which enables you to process payments in your shop. You agree to pay the merchant processor a flat % of the revenue and a per transaction fee. Sometimes they will also charge you a statement fee per month. The flat % rate on each transaction can be anywhere from 1.65% to 4% depending on the credit, volume, and nature of business. This way the shop can accept the best credit cards that are offered to consumers which may include Discover, AMEX, Visa, and Mastercard. They give up the fee because they don’t want to become a bill collector and charge late fees. This is why many businesses don’t accept checks anymore – it’s up to the business to collect on that check if it bounces at the bank upon deposit. So the big credit card issuers become the collector and they charge hefty rates on the late balances.
Invoice factoring companies are also able to attach interest and late fees if the invoice they are sold is paid late, but it depends on the agreement for services.
So think about it this way – factoring is all around us. It’s used everyday in almost every corner of the world. Essentially, Chase Bank, AMEX, Discover, Citi, and many others are in the factoring business and nobody really calls them that – but that’s the true nature of their business.
Hope this helps explain the business of factoring. Thanks and good luck.
