Factoring is a type of service. It has a price. The cost of factoring is first for the person who delivers it and then for the buyer.
We need to first look at the operating expenses and then calculate the estimated cost of Factoring.
1. Requires cash discounting or bank overdraft costs
2. The cost of the work of those responsible for customers’ accounting management (invoicing, reminder payments, dunning, etc.).
The volume of financed invoices is used to calculate the cost of Classical Factoring. This is a different solution to fixed-rate factoring or one-shot invoice factoring.
The cost of factoring generally consists of three elements:
1. Direct Financial costs
2. Financial Management costs
3. Other related expenses
1) Direct Financial Costs
It is directly related to special financing. In other words, it refers to a contractual financing interest that was applied to a specific amount over a specified time.
Technically, this rate is made from a reference rate (such EURIBOR 3 months) and a margin. If the reference rate falls below zero, the only margin that makes the financing rate is 0.
This financing rate can generate interest that could be:
*Pre-estimated and upfront charged: The Factor calculates the financing rate based on the customer’s payment history. It’s the average customer’s term of payments.
* Based on actual realized figures. The financing rate is applied to the exact amount and for the duration.
Warning: Factoring contracts may include an increase in the financing rate and, thus, in the global cost for the factoring operation in the event of a delay in the payment term. This increase is generally applied after a particular time when the payment due date on the invoices has passed.
2) Financial Management Costs
These costs arise in the invoice’s factoring process itself. The latest is being made of expertise and time. This cost commonly referred to as the Factoring Fee >>, is variable and represents a percentage of the turnover purchased by the Factor.
The Factor’s mission and the Factor’s chosen Factoring program directly affect the commission fee rate. The commission fee rate for 5 million euros of financed turnover in a traditional Factoring contract will be lower than that in fully delegated factoring.
There are two possible explanations for this: The Factor finances the invoices and manages all reminder and dunning payments. They also provide financial guarantees and oversee the entire management process (cashing and bookkeeping, accounting, etc.). The Factor finances only the invoices that are being considered and delegated customer account management.
1) Other related expenses
They are the result of all remaining costs. Let’s not forget the monthly price for access to the Factor’s internet platform, which allows you to review any updated figures at any time (payments delays and detailed costs list ). You will also find the fees and rates for the services you are considering.
For newcomers to the Factoring Services Market, the latest being independents and not Bank Group’s subsidiaries, these other expenses are combined into a “Services Fee.”
The role of the Trader
Factoring traders are experts in enterprise finance and have a wealth of experience in cash management. He is an expert in all aspects of factoring solutions and, often, a credit-insurance specialist. This is logical, considering the fact that these two products (invoices financing & credit insurance) are both bound and complementary.
The factoring trader then has to recommend the factoring solution that best suits your current and future needs. The factoring trader is able to find the right combination of contracts for each case and context. This allows his customers tangible cost savings and cash flow optimization.
The price of trader’s services
It’s literally and surprisingly free for the customer.
The Factor actually pays the trader a regular commission fee.
It is possible to conclude that factoring trader services are a great deal for customers.
* His independent role and his role make the factoring trader an essential strategic partner for customer’s companies.
* Because he is evaluated on the actual benefits of his intervention for the customer company (savings or new developments), he is naturally committed to customer satisfaction.
* He is a free expert for the customer company and is directly paid the Factor commission fee.