Invoice factoring rates

The decision to use invoice factoring as a means to improve your cash flow and grow your company can be hugely beneficial. The right solution can help improve sales and put your business on the path to growth. Whenever you think about invoice factoring as an option, you must consider the factoring rates involved. However, choosing the wrong solution, or an alternative which turns out to be too expensive, can make things much worse and potentially put the business into a precarious position.

How much does it cost to factor?

In addition to “one-off” fees such as set-up fees and exit fees, there are two main components which make up factoring costs – the service fee for managing the facility – and the factoring rates involved.

What is a factoring rate?

Factoring rates are effectively the amount you’re charged, by the factoring company for using the facility. These rates are similar to the interest charged by a bank for borrowing. Some companies may also refer to this as a factoring fee or a discount fee, but the exact terminology will often vary from company to company.

• A factoring rate is typically charged on a monthly or weekly basis and is very similar to the interest you would pay on a bank loan.
• The factoring period is the length of time it takes your customer to pay their invoice. If your client has a longer repayment term, then you will pay a higher factoring rate to that of an invoice with a shorter-term repayment.
• Factoring rate charges usually range from between 0.5-5% and are calculated on a percentage basis of the invoices value.

What influences a factoring rate

Just as with a bank or any other form of lender, factoring companies will assess the risk and reward when deciding on factoring rates for your company. The higher the perceived risk involved with operating a facility, the higher the cost.

The lenders providing the facility will look at all the risks involved with buying your invoices. This will include looking at your own company and industry, but most importantly they will look heavily at your clients, their track record, credit history and sector. Factoring companies want to see:

• A system in place for your business to issue invoices effectively and maintain your ledger.
• A healthy spread of debtors. Ideally, factoring companies don’t want to see an over-reliance on two or three large clients.
• Good quality debtors who pay on time and have a solid credit rating.

If your company is deemed high risk by a factoring company, it will be reflected in the factoring rates offered. Factoring companies don’t like to see:

• Large volumes of small invoices, these are harder to manage and involves a higher amount of credit checks being carried out.
• A poor history of bad debts and invoice management.
• Contractor invoices, these come with terms and conditions which give debtors an opportunity to potentially wriggle out of paying. Within some industries, it is impossible to avoid a contractual debt. However, some factoring companies will specialise in this area.

Common factoring fee structures

Invoice factors typically structure fees in a few different ways. Most commonly, factors might calculate your fee on a tiered factoring fee or a flat fee basis.

• Flat fee – This is a simple fee, with the factoring company charging a percentage of the invoice, the fee won’t typically change regardless of how long the customer takes to pay the bill.
• Tiered factoring fee – Factors charging a tiered fee will make a charge per days outstanding on the invoice. The fee is accrued on a monthly, weekly or daily basis. Alternatively, some factors will calculate the fees in blocks of 10 or 15 days.

What we can do for you

If you believe that a factoring facility would be beneficial 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.

What needs to be considered when thinking about the cost of factoring, is the price you may have to pay if you don’t factor. If you don’t end up bringing in a factoring facility your company could end up paying the cost.

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 can secure the top rates with a package that is the right fit for your business.