Factoring charges - the hidden cost.

Factoring charges consist of two main elements. The first is the factoring commission which is normally expressed as a percentage of turnover and the second is the interest rate which is normally expressed as a rate of between 1% and 3% over Base Rate per annum on amount “borrowed” until such time as the factoring company is repaid.

It should follow therefore that the factoring company quoting the cheapest commission and interest rate is the one to sign up with as the costs will be the cheapest, but sadly that isn’t the case.

There are many operational differences between the many factoring companies and bearing in mind that sales ledger maintenance and credit control is part of the package, there are also substantial differences between the various factoring companies in the quality of their service all of which will affect the overall cost of factoring.

A company may approach factoring with his customers averaging 60 days to pay and will calculate roughly how much his interest charge should be as competing factors are quoting the same rate of 2.5% over Base Rate. Many of the factoring companies have a pretty poor record of credit control and that average of 60 days will soon slip out to 70 days in the hands of the wrong one. Conversely another factoring company may have a much more effective administration and their professional approach will reduce the average credit period to 50 days. Using these two examples, both have quoted the same headline interest rate but the inefficient factoring company will end up costing 40% more in interest charges than the other.

Many factoring companies whilst having to quote lower and lower headline rates to appear competitive are also devising different ways to levy extra costs to increase their own profitability, many of which are glossed over until the ink on the agreement is dry. Same day transfer of funds at costs of up to £80 per time - low overall funding limits which will be reviewed at a cost of £2,000 - low concentration limits with a charge every time the client breaches the limit, the list seems endless with seemingly the more creative factoring companies finding new ways to charge extra every month.

Hopefully we have shown you that there is far more to the cost of factoring than the quoted headline rates but unfortunately it isn't just a matter of digging below apparent costs as some factoring companies offer a very poor service overall and in order to decrease their own risk have resorted to the use of unapproved debts and concentration limits to keep the funding levels down.

We have devoted a couple of very short pages to both of these subjects and would appreciate it if you could take a couple of minutes to read firstly why some factoring companies offer such a poor service - by clicking on the underlined link.