How much does Factoring cost, really?
When deciding if invoice factoring is the right path for you, how much factoring costs will be one of the main considerations you will be thinking of. For some, it’s a great avenue to pursue to generate needed cash based on unpaid invoice value, for others it can put a huge financial strain on their business.
Nonetheless, we will show you what costs are involved in Invoice Factoring to help you see the reality and show you the advantages and disadvantages for illustration purposes to give you a better idea of this often-complicated financial service.
With that in mind, there are three main parts to the initial cost of factoring
- One time set-up fee
- Service fee
- Discount charge
Let’s look at each of these factoring cost considerations in turn…
1. One time set up fee
This fee is as it states on the tin. The one off factoring set-up fee is what you pay the company to set up your account and is like an administration charge, which probably most people dislike.
This one time set-up factoring charge varies from provider to provider; however you shouldn’t have to pay more than a few hundred pounds as the primary reason for the set up charge is to cover the costs of the legal agreements ..
2. Service fee
The service fee is all about the cost of providing the factoring service to you and managing your account for the duration that you use it. Factoring companies tend to state that the service fees vary from 0.5% to 2.5% and generally, the bigger your company, the lower will be the commission rate based on a percentage of sales (turnover).
3. Discount Charge
Factoring companies apply a discount charge when you take an advance payment against your factored invoices before your clients or customers pay. For the period between the two actions, you will most often pay this fee based on an interest rate on a daily basis.
With some companies these costs can be highly expensive and can end up as a higher cost than originally forecast.
The interest rates used by the majority of factoring companies are around the 2.5% to 3% above Base Rate mark. Both the bank-owned company and the independent providers normally quote similar interest rates.
However, although one provider may offer, for example, a service fee of 1.25% of turnover, another factoring company may undercut this by offering 1% of turnover
On the surface, the latter may seem like the better deal, but when you account for all the above costs, this deal starts to get much more expensive.
Initial Costs in Conclusion
These standard costs to factoring are indeed where you need to be savvy and informed when choosing the right provider for your business. This is where our free broking service can save you money right from the start as we have over 30 years experience in this field.
For instance, there soon can be other unforeseen costs involved once your factoring is set-up and running…
The cost of using poor factoring services
When using a factoring service from a poor provider the costs can soon escalate unnecessarily. This is where many businesses will end up paying much more than the quoted price for services.
There are two main culprits:
1. Lack of effective customer communications
In essence, if providers are not asking customers to pay their debt on time and in full, then providers can extend the average credit period of 60 days to 90 days or more. This will cost you more than the quoted price and rates because of poor communication.
2. Re-factoring Fees
Other costs include the re-factoring fees that are payable when the service provider has poor sales ledger management skills and debts on invoices become overdue. Factors often charge re-factoring at 0.5% to 1% per month on debts over 90 days old.
Of course, these debts can escalate if not dealt with promptly and consequently so do the fees.
Cost advantages of using a quality Factoring Provider
- Quoted costs generally true reflection of actual costs
- Fewer clients for more personal attention
- Greater frequency of customer communications
- Unlikely to have rising costs due to mismanagement issues
Cost disadvantages of using a poor quality Factoring Provider
- Rates often geared to entice new business
- Costs often more expensive than advertised
- Saturated services meaning poor personal attention
- Many times, serve poor customer communication
- Frequently raising costs due to mismanagement
Are you looking to avoid these cost minefields? Would you like our expert advice and help?
We only work with the factoring companies that offer a quality service and our broking service is Free.
Factoring companies pay us a commission when you open an account with them meaning that we have no affiliation and no direct costs to you. This way we can offer you unbiased, impartial and free independent factoring advice for your unique situation.
For a friendly, no-obligations chat, simply call us on 01827 707680.