For many business owners, selecting an invoice factoring company is an intimidating process. With each company submitting lengthy proposals full of technical jargon, (and references to numerous different types of ‘fee’) the hope of finding a cash-flow solution is quickly tempered by the sensation of drowning in data. This article aims to help you understand what the terminology of these documents means, and what criteria to focus on when selecting the company right for you.
One point to make clear is that invoice factoring is a service whereby the factors chase your debtors for you (unlike invoice discounting, in which you retain control over your own credit). As such, factoring is always more expensive, as this part of the service can be time-consuming.
How to Evaluate the Right Invoice Factoring Company for Your Situation
Is the price right?
There’s little doubt that price remains the defining factor for many people. But actually working out how much the different factoring companies charge can be a minefield in itself, since the terminology is not entirely uniform across the industry, and some companies charge a single administration fee whereas other companies break these costs down into increasingly subtle minutiae.
The following section attempts to break down the specific fees referenced in the industry.
Usual invoice factoring ‘service fees’ range from between 1 and 6 percent, based on your industry, the average creditworthiness of your customers, and when the invoices are paid to you. This fee covers all the collections work including the processing of invoices and chasing of debtors etc.
In most cases, there is a ‘minimum fee’ -, i.e. a baseline fee you will be charged however much invoicing is raised.
Additional costs often include:
One Time Set-up Fee – Again, this is dependent on the complexity of the finance required, annual turnover, number of monthly invoices etc. An average cost for a company borrowing £100,000 for the period of one year, this can be around £1000.
Extended service fee –
Refactoring fees – these are applied where an invoice has been outstanding for longer than the approval period
- Discount charge
- Audit fee
- Trust account fee
Credit insurance service fees: Most factors will offer a non-recourse factoring contract which means they take on the risk of unpaid debts and don’t charge this back to you. This will cost extra.