Updated: 5th February 2020
Factoring costs can vary considerably between lenders. Different structures may be used to arrive at fees and additional costs, and lenders can have varying tolerance levels in relation to the risk of non-payment by your own customers.
Factoring costs will include service or management fees, and a ‘discount fee’ which works in a similar way to the interest applied to standard bank loans. So if you think the cost of your factoring facility seems high, how can you reduce it, and get the most out of this flexible form of finance?
By carrying out a full market review of your facility, you see whether the factoring fees charged by your current lender are high. You’ll also have more idea whether the arrangement is structured in the best way, and maximises your cash flow.
Sometimes a lender might offer a limit that’s higher than you currently need, but this is costing you in terms of unnecessary fees. If this is the case, you could approach your lender to see if they can offer lower fees for a reduced limit.
Your lender may have a very attractive ‘headline’ fee but it doesn’t necessarily mean that your overall costs will be low. When you factor in additional costs and disbursements, you may find that it’s an expensive facility that isn’t bringing the financial rewards it could.
It’s a good idea to request a review of your fees from time to time, but particularly if your turnover has increased significantly since the arrangement began - a higher turnover should mean a reduction in fees.
If you’re using same-day CHAPS transfers, it’s an expensive way to operate the facility. The BACS system takes a little longer, but it’s free, and with the reduction in cost it may be a better way to have the money transferred.
Your factoring arrangement may include the lender taking over credit control for your business, with a resulting increase in fees for the service. An alternative to factoring is invoice discounting which leaves credit control in your own hands, and could considerably lower your service fees.
When your factor releases money, it’s paid into your factoring account and then withdrawn to your bank account as needed. By keeping your bank account as close to a zero balance as possible, you’re effectively reducing your borrowing and therefore the fees.
Accurate cash flow forecasting helps you anticipate any shortfalls in the coming months, and better manage your borrowing levels. You can forecast on a daily basis if necessary – a good idea if you’re experiencing a worrying financial decline.
By understanding this type of lending, how lenders perceive their risks, and the way in which costs are arrived at, you can better identify any anomalies or inconsistencies in this and any future factoring agreements you enter into.
Our experts at Real Business Rescue can provide the professional insight you need when it comes to the costs of factoring and invoice discounting. We’ll undertake a review of your current costs, and identify potential areas for negotiation with your lender. We also have contacts with alternative lenders around the country. Call one of the team for a free same-day consultation - we operate from Over 70 UK Offices.