Factoring is a service, and as a service it has a cost. This cost is first for the one who delivers it, and then for the one who buys it.
To get a real estimate and a good understanding of the cost of factoring, we first need to look at and put together the operating expenses that it answers:
1. Financial costs of bank overdrafts or accounts receivable discounting necessary to meet cash needs
2. At the cost of the work of those responsible for the accounting management process of the clients (invoicing, payment reminder, claim, etc.)
3. At the cost of Credit Insurance or unbudgeted losses due to non-payment of invoices
The cost of factoring
The estimation of Classic Factoring costs is based on the volume of financed invoices. In this regard, it is different from other solutions such as one-time invoice factoring or fixed rate factoring.
Generally the cost of Factoring is made up of three different elements:
1. Direct financial costs
2. Financial management costs
3. Other related expenses
1) Direct Financial Costs
It is directly linked to the pending financing, that is, to a contractual financing rate applied to a certain amount during a certain period of time.
This rate is technically made up of a given reference rate (such as the 3-month EURIBOR) increased by a margin. If the reference rate is negative, then the only margin is the financing rate.
This financing rate generates interest that can be:
• Pre-estimated and collected in advance: Based on the payment history, the Factor applies the financing rate to the amounts financed for your average customer payment term.
• Calculated on actual figures realized and subsequently collected: The financing rate is applied to the amounts financed and for the exact duration used.
Warning: Some Factoring contracts include an increase in the financing rate and therefore in the global cost of the factoring operation in case of delay in the payment term. This increase is generally applied after a certain time when the payment date written on the invoices is exceeded.
2) Financial Management Costs
These costs originate in the invoice factoring process itself, the last fact being time and expertise. This cost, generally called “Factoring Fee”, is variable and is a percentage of the billing purchased by the Factor.
The commission rate is a direct function of the Factoring program chosen, as well as the Factor’s missions. For example, the type of commission corresponding to 5 million euros of financed billing will be higher in a classic factoring contract than in a fully delegated factoring contract.
Of course, there are explanations for this: in the first case, the Factor finances the invoices sold, manages all payment reminder and claim processes, the financial guarantee and the entire management process (cash, accounting, accounting process, etc. ). In the second case, the Factor only finances the invoices considered, and delegates the management of the client’s account.
1) Other related expenses
They result from the combination of all other remaining costs. Among others, let us mention the monthly cost of access to Factor’s internet platform that allows updated figures to be reviewed at any time (payment delays, detailed list of costs, etc.). Here you can also find in general the proposed services and the rates and operating fees.
In the case of newcomers to the Factoring Services Market (the latter being generally independent, and not subsidiaries of the Banking Group), these other related expenses are grouped into a set called “Service Fee”
The role of the merchant
As an expert in business finance, the factoring merchant generally has a great deal of knowledge and experience in terms of cash management. He is well versed in the composition of all factoring solutions and is often an expert in credit insurance as well. This makes perfect sense considering that these two products (invoice financing and credit insurance) are binding and complementary.
Then, the factoring operator has to find and suggest the factoring solution that globally best suits your real needs (current and future). Due to its ability to identify the best combination of contracts in each specific case and context, the factoring merchant seems to have a true added value that allows its clients tangible cost savings and cash flow optimization.
The cost of the merchant’s services.
It is amazing and literally a free service for the customer…
In effect, the factor pays the merchant directly on their own regular commission rate.
conclusion
As a conclusion, it can be said that using the services of a factoring merchant is a real bargain for the client.
• Both its role and its independent position make the factoring marketer a strategic partner without equivalent in the Banking Groups for the client company.
• Because it is judged by the real benefits of its intervention for the client company (savings, new developments, etc…), it is by nature permanently committed to client satisfaction.
• Acts as a free expert for the client company as he is paid directly on the Factor commission.