Factoring is one of the easiest and most effective ways of accessing finance for your business. However, even though it is more and more difficult to access more conventional types of finance through institutions such as banks, many companies still have not considered factoring as the answer to their cashflow worries and business growth plans.
One of the sticking points is often not understanding how factoring companies charge for their services. This is understandable but the fact is factoring is a really easy process and everything is very transparent and clear once you understand what is going on.
The factoring fee
Factoring companies charge for their services with their factoring fee. This is a % of the amount of invoices that you require factored. The exact rate of the factoring fee depends upon a number of things:
- The industry you are in – Some industries are generally more creditworthy than other which can lead to some industries getting preferential factoring rates.
- The volume of invoices you require factoring – The more invoices you require factoring, the lesser the fee you will generally pay.
- The factoring company you use – Different factoring companies have a range of different factoring charges.
- The terms of your invoice – The length of time your customers have to pay will affect the rate you are charged.
- How creditworthy your customers are – The better their credit rating, the better the overall fee.
As a guide the typical SME may be looking at a service fee of between 0.5% and 2.5% of factored invoices plus interest on the funds advanced at something like 2.5% to 3% over Base Rate. To get the very best terms for your factoring though, you should really use the services of a factoring broker as you’ll get the best terms for your business and won’t pay anything extra.
The reserve amount
Something that many people don’t understand about factoring is the reserve amount. When an invoice is factored, your business receives a % of that invoice straight away, let’s say in this instance it is 90%. The remaining 10% is kept as a reserve to cover factoring fees and as a buffer against any bad debts. Once the invoice is paid by your client to the factoring company, this, minus the factoring fee is returned to you.
Are there any other fees involved?
There can be, which is why it is wise to use a broker who can navigate you through the different options available. Some companies charge an application fee for example and some may charge for bank transfers and other things. Sometimes there can be so many factors and fees to consider, it can be difficult to pinpoint which is exactly the best deal for you which is why it is essential to take expert advice to get the best deal possible for your company.
If you would like to know more about factoring and how it could help your business then don’t hesitate to contact Factoring Solutions for a free, no obligation chat on 01827 707680.