Factoring charges normally comprise two separate costs. The first is the factoring commission rate which is traditionally expressed as a percentage of turnover and the second which is the interest rate, is usually charged at a rate of between 1% and 3% over Base Rate per annum on the “funds out” until such time as the factor is repaid.
Factoring Charges – in practice
In the face of ever increasing competitiveness in the factoring market some of the major names are trying on the one hand to appear competitive by quoting low headline rates whilst at the same time maintaining their own profitability by devising new methods of levying additional charges on their unsuspecting client.
One factoring company often offers a factoring commission rate less than half of that of the market rate. Their facility also comes with an unreasonably low overall funding limit that they claim to be willing to review for a substantial fee and which if the company meets it’s sales forecast would have to be reviewed twice in the first year.
This inevitably results in the company paying more overall than if they went with a factor who’s headline rate was higher but who set realistic funding limits and didn’t charge to review them anyway
The latest charges “extra” that has been recently adopted by at least two of the major independent factoring companies is aimed at client companies that have a debtor concentration where one major customer accounts for more than 40% of outstanding invoices.
Most ethical factoring companies will set a limit expressed as a percentage of outstanding debts or even a fixed sum, above which they will not fund the particular client’s customer but two of the larger and better known independent factors have come up with another income earning wheeze where they will set an unrealistically low credit limit or concentration limit but will happily fund in excess of that limit subject to an automatic charge.
One company unhappy with the cost of his factoring facility was found to be paying £1,000 per month in factoring commission plus £1,600 per month in additional charges until we replaced their facility with one where the charges were exactly what was stated on the tin.
We are very careful who we deal with and will not place any business with any factoring company who’s charges are not transparent and properly explained at the outset and it is surprising how many of the big players in the factoring market we will no longer deal with due to this.