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Factoring Interest Rates in Marketing

Factoring Interest Rates, the small print

factoring interest ratesIn a bid to grab more market share it is becoming increasingly common to see eye catching headlines in promotional material including such statements as

“only 1% over Base Rate”

or

“an interest rate probably lower than your overdraft”

but headlines like that can be misleading as we hope to illustrate:-

Assumptions: Turnover £750,000pa – Average debt turn 50 days – Base Rate 0.5%

Debts Funding Interest at Interest at Difference Difference
outstanding at 80% 2.5% over base 4.5% over base in £ in % of turnover
£123,288 £98,630 £2,959 £4,932 £1,973 0.26%

 

As you can see in the above example the actual difference in cost between the headline grabbing 2.5% over Base and the more normal 4.5% over Base equates to 0.26% of turnover.

This shows the importance of costing the whole package because if the more marketing savvy factoring company had quoted a factoring commission which was 0.2% of turnover higher than their competitors they would effectively be more expensive overall.

The other point to consider is the effectiveness of the factor’s sales ledger management and credit control. The above example assumes that the customers are averaging 50 days to pay their accounts but if through the factor’s inefficiency this was allowed to slip by a mere fortnight, the headline grabber’s interest charge would end up costing the same as the more efficient factor charging the normal rate.

The next two pages ask why some factoring companies offer such a poor service and how some factors deliberately unapprove debts to keep the funding levels down.