Cost of factoring

A Factoring company charges a commission or fee for performing the credit and collection function for factoring and for purchasing the client's receivables with or without recourse to the client for bad-debt losses. The factoring commission (fee) for service usually ranges between 0.1% and 3% of factoring sales. A number of conditions will determine the costs for a factoring service such as:

• The nature of the business, including styling considerations, seasonable aspects, stability of products, whether the customer is a manufacturer or wholesaler the factoring company looks at closely
• Annual sales volume of client. As volume increases, the percentage charged will usually decline and the factoring would apply a siding scale
• Average size of order processed. Large orders are no more time consuming to process than small orders and produce more revenue for the factoring company. Therefore, the factoring company’s commission rate may decline as the size of the individual orders rises
• Average annual sales volume per customer. As this figure rises, there is less work and follow-up for the factoring company, since the client's business is becoming concentrated in few accounts. The factoring company commission rate will tend to decline
• Credit worthiness of the client's customers. If the risk is relatively small, the factoring company’s commission may be lower
• Client's selling terms. If they are long, the factoring company must wait to collect its receivables, this would require a higher fee
• Other services such as billing, may be provided by the factoring company that will increase costs and raise the charge to the client

Additionally, the factoring company charges interest (fee) on funds provided. This borrowing is typical is charged a rate above the Bank of England base rate.

Author: Toni Nicholson, factoringcompare.com, 22/10/2009