Factoring Fees Explained
Factoring is a way for a business to generate money in a short amount of time. By selling unpaid invoices to a factoring company, the business can gain income either for the short-term running of the business or for long-term growth. Rather than waiting weeks or even months for customers to pay their invoices, the business has the money at hand, usually within 24 hours.
Factoring is a reasonable alternative to bank loans for a couple of reasons. Firstly, the money the business gains come from their own invoices, not a loan they might struggle to repay. Secondly, bank loans can take an extremely long time before approval comes through.
Below, we compare typical charges for the different forms of factoring…
Compare and Contrast Fees
Factoring and invoice discounting can carry a variety of different fees and charges, with the amounts varying depending on the lending company and other factors.
Costs are often open to negotiation, so it pays to take in lots of different companies and compare the basic fees that apply across the industry:
- Service Charges: This is the charge that the lending factoring company levies for handling the administration and collection of the business’s invoices. How high or low this fee is depends on a few different things. The number of invoices the business wants to sell and the number of customers the business has will affect these credit management fees. The business turnover also directly affects how much the factoring company will charge in management fees. Fees in this area generally range from 0.75 percent of turnover up to 2.5 percent. The larger the business, the lower the fee will be as the factoring company will be collecting more money from a large client’s invoices.
- Discount Charges: Just as a bank charges interest on a loan, discount charges work the same way for factoring companies. Lenders base interest charges on the funds in use, to make the amount as fair and accurate as possible.Charges range from 1.5 percent over the base rate of inflation up to three percent over the base rate. Once again, larger businesses receive the lower rate as they are more likely to be asking for a larger amount of money.
- Additional Fees: It is important to ask if there are any other fees. For example, some factoring companies offer ‘Credit Protection’, which offers insulation from any bad debts. This generally means that if customers cannot or will not pay their invoices the credit protection shifts liability for these bad debts to the factoring provider, rather than the business.
- Termination Periods: Many factoring providers call for a three-month cancellation period, but it always better to know than to assume. A longer termination period means more fees and lending arrangements that the business may no longer want or need.
- Commitment or Arrangement Fee: This is usually a one-off fee that the provider charges to cover the documentation and filing charges for the factoring or discounting service. An arrangement fee is not usually refundable. It is a single payment for setting up the factoring facility. A commitment fee is different in that the business may get a refund once the relationship between the lender and the business is underway. It is important to understand what arrangement or commencement fees the lender expects and if it is refundable.
- Minimum Annual Service Charge: Some lenders might call this a ‘Service Charge’, and may charge it monthly, quarterly or once a year. It is calculated and based on the business’s turnover. The purpose of this charge is to provide the lender with the minimum amount of return they expect for providing lending facilities. It helps ensure the lender makes their money even if the business’s profits and turnover tumble downwards and miss projected income.
Invoice discounting is very similar to invoice factoring but has some subtle differences that alter the scale of the fees and charges attached.
In invoice factoring, the business hands over invoices to a factoring provider who maintains the sales ledger and they swiftly pay the business a percentage, which is usually between 75 to 90 percent of the value of the invoices.
In invoice discounting, the arrangement is different as the business retains control of their sales ledger and credit control processes. The business has to ensure that they collect their invoices on which they have received payment. For this reason, discounting is usually offered to businesses that can demonstrate a track record of collecting payment successfully.
Because the burden of collection is still on the business, the fees associate are lower than those around factoring. Typical fees range from 0.2 to 0.75 percent of turnover.
- Instead of taking on the collection duties, firms providing invoice discounting provide funds but leave the maintenance of the sales ledger to the business.
- Because they take on less of the burden, firms offer lower fees for invoice discounting facilities, usually between 0.2 to 0.75 percent.
Comparing the Market
Finding the right factoring solution take a little bit of work, as there are many providers out there. They range from specialist operations to well-known high street banks. The level of fees changes from company to company, as do other factors such as contract length and setup fees. Because factoring takes into accounts many facets of business worth, performance and expected income, it takes a complex accounting of a business to come up with the right lending solution.
Luckily, many resources online help businesses find the best offers on the market.