Cost of factoring

Invoice factoring is a great product for growing businesses, providing the extra cash needed to fund expansion. It also helps businesses struggling with cash flow, or those who need a rapid injection of cash. But what is invoice factoring and how does its pricing change? Essentially it depends on a number of different variable factors.

There are two main elements which make up the bulk of factoring costs, namely

• Discounting fee (also known as the factoring fee or factor rate) – which is effectively the interest paid. The factor rate is the amount that the factoring company charges you on a weekly or monthly basis, for releasing the cash and is very similar to the interest a bank would charge for letting you borrow money. Factoring period length is the amount of time it takes your customer to pay their invoice. It follows that if your invoices have a longer repayment term you will pay more in your factor rate than an invoice with a shorter term. These charges are calculated on a percentage basis of the invoices value and usually range from between 0.5-5%.
• Service fee – the charge for managing your invoices, account and ledger and usually calculated as a percentage of gross turnover

Most factoring companies make extra charges such as arrangement fees (to set up the facility), exit or termination fees, survey fees, audit fees and penalty fees. There may be other charges and the terminology can vary from company to company. This can make a comparison between companies and terms very difficult.

What can affect the cost of factoring?

Like any lender or funder, factoring companies will measure risk against reward – the greater the perceived risk the higher the reward they will seek – a greater cost to you.

Factoring companies tend to look at several key factors when it comes to providing a facility. Whilst they will look at your own company, they are even more interested in the customers you supply – their track record, credit history and the industry in which they operate. In simple terms factors like and will therefore generally charge less where there is:

• A good “spread” of debtors – they would rather see 20 or 30 customers in your ledger than heavy reliance on 2 or 3 (- however, please see “spot or single invoice factoring” below)
• Good quality debtors – they will look at the credit rating of your customers and if they are prompt payers
• Good systems in place in your business for issuing invoices and maintaining your ledger, and a good history of low bad debts

Factors which will increase cost:

• Contractual debt – where instead of issuing “clean” invoices for the sale of goods or services, there are terms and conditions attached. This could mean that the customer could avoid paying, if those terms have not been fulfilled. Contractual debt often occurs in the construction industry and as a result, some factors will avoid construction transactions. Others choose to specialise in that area.
• Very large volumes of small value invoices – more difficult to manage / credit check. It is easier for a factor to process a handful of sizable invoices than dozens of small value invoices
• A poor history on your part of bad debts and invoice management

A lender may still provide facilities in these situations but may charge more to reflect the perceived increased risk.

Spot or single invoice factoring

Traditional factoring contracts are agreed for a minimum period of time covering a company’s ongoing cash flow finance needs, across the whole ledger.

Spot or single-invoice factoring involves a one-off transaction against a specific invoice. It is a short-term arrangement for a specific financial need without any ongoing longer-term commitment between the parties involved.

Charges are based on the time the funds are lent and the percentage advanced. Single invoice or spot factoring can be cost-effective for one-off situations but to meet an on-going requirement a regular, longer-term, whole ledger factoring facility would be better value.

What can we do for you?

If you believe that a factoring facility would be beneficial for your business and allow you to take steps forward as a business, but are unsure about the best way to secure a good facility, or are concerned about the cost of factoring, we can help give you the best option.

We are uniquely positioned in the financial sector to help you secure the best factoring facility. Working closely with the top blue-chip lenders, we are able to secure the top rates with a package that is the right fit for your business.