In this Example of Factoring Cost Comparison, two quotes from Factors with differing levels of service This comparison is between a factoring company with a cheap quote and a poor service and another factor with a more expensive quote but a more professional sales ledger management service. Both will quote the same 7% pa for the cost of funds. Assumptions;– turnover of £750,000 pa and customers taking an average of 60 days to pay on commencement of the factoring agreement.
Factoring company with cheap quote and poor service
Factoring commission
1.00%
Factoring interest
7.0% pa
Average credit period
70 days
Factoring commission cost
8,813
Factoring interest cost
9,464
Total factoring costs
18,277
Factoring company with more expensive quote but better service
Factoring commission
1.25%
Factoring interest
7.0% pa
Average credit period
50 days
Factoring commission cost
11,016
Factoring interest cost
6,760
Total factoring costs
17,776
As can be seen in the above example the savings made in interest charges by the more effective factoring company more than offset the higher commission rate that they have quoted as the efficient factor’s professional credit control has managed to reduce the average period taken by customers from 60 days to 50 days whilst the inefficient factoring company has let the average period taken by customers slide from 60 days to 70 days. NB The figures quoted may look odd at first glance as they take account of Vat on the invoice values for charging the Factoring Commission and calculating the outstanding debts.