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Invoice Factoring Costs
Factoring is more affordable than most companies realize. The two basic fees paid to the factoring company are: the service fee and interest on the amount advanced.
Service Fee. This fee represents the cost of outsourcing to the factor your sales ledger management. For this fee the factor will issue your invoices, perform credit checks and install credit control, follow up and chasing of customers. The service fee is a percent charged against your turnover. The fee usually varies from 0.5% to 3.0%. Some of the services the factor may perform may be not feasible for you to do on a regular basis and this may improve the speed of payment and decrease the chance of non-payment.
Another benefit of outsourcing your sales ledger management functionality is that you changed a fixed cost to a variable cost. This will provide you better visibility on your expenses associated with your services/product.
Interest Charge. The interest is charged on the actual amount of your invoices that you advance. This will usually be expressed as a fixed percent above the factors base rate. The base rate fluctuates with the Bank of England rate. The cost of borrowing against your invoices should be cheaper than a traditional overdraft as you are providing security. Another benefit is that the amount you can advance from a factor should grows with your turnover, and the amount you invoice while the amount you can borrow on an overdraft depends on the amount set by your bank.
To help better understand the costs associated with factoring and the cash
flow, please review the illustration below. The illustration
is based on a company with £600,000 turnover who utilizes
their entire cash advance facility.
Please note the interest charged and factor service fee rate will vary from company to company and time to time.
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