How to Compare Costs on Factoring Quotes

A quick guide how to Compare Costs on Factoring Quotes

Here Ian Johnston of independent broker, Factoring Solutions, looks at how one offer on your factoring costs might look like a good deal but a closer look at your figures, and knowing what to look out for, can save a company a lot of money.

This is a factoring cost comparison using a company with an annual turnover of £750,000. Its customers take an average of 60 days to pay and it is looking at two quotes from companies willing to factor their invoices.

Both quoted the same interest rate

Both have quoted the same interest rate of 2.5% over Base for the cost of money but while the independent factor has offered their facility at 1.25% of turnover, the big bank-owned factor has undercut that by offering their facility at 1% of turnover.

On the surface the second offer seems to be a substantial saving. The reality is different, however. The independent factoring company has an effective and professional credit control policy, with sufficient staff to carry it out properly and they manage to reduce the average period that the customers take to pay their debts from 60 to 50 days.

Reducing payment time

The large bank-owned factoring company has a very inefficient sales ledger management policy with individual staff carrying a much higher workload than the independent factoring company.

Little credit control done by telephone, relying instead on computer-generated letters and tightly crossed fingers. It is no surprise that if the customers aren’t asked to pay, they won’t and it doesn’t take long before the original average credit period of 60 days has slipped to 70 days.

The decrease in the time taken to pay by customers will reduce the cost of borrowing from the independent factoring company, while the increase in the average time to pay at the large bank-owned factor will result in the client having to pay a higher cost than originally forecast.

While both factors have quoted the same rate of 2.5% over Base the actual borrowing cost from the bank-owned factor will end up £2,704 more than the independent, which if expressed as a percentage of turnover will be 0.36%.

The original offer from the bank-owned factor was tempting as the factoring commission was 0.25% cheaper but as can be seen, appearances can be very deceptive and what on the surface appears to be the most cost effective route, frequently isn’t.

Other side effects of poor sales ledger management include the factor reaching the recourse date when they ask for their money back, the imposition of re-factoring fees which can run at 0.5% to 1% per month on overdue debts and of course the increased risk of suffering even larger bad debts

Ian Johnston is with Factoring Solutions  an independent specialist factoring and discounting broker. He has been in the industry for over 30 years

The above article was published by Finance Week on 12th October 2008

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