factoring cost comparison

A factoring cost comparison using a company with an annual turnover of £750,000 who's customers take an average of 60 days to pay and are looking at factoring their invoices have had quotes from two factoring companies.

The first is from a well known bank owned factoring company with thousands of clients and a “buy the business at all costs” philosophy whilst the second is from an independent factoring company with a good reputation in the market place for the quality of their service

Both have quoted the same interest rate of 2.5% over Base for the cost of money but whilst the independent factor has offered their facility at 1.25% of turnover the big bank owned factor has undercut that by offering their facility at 1% of turnover which on the surface seems to be a substantial saving.

Reality is different however as the independent factoring company has an effective and professional credit control policy with sufficient staff to carry it out properly and they manage to reduce the average period that the customers take to pay their debts from 60 days to 50 days.

The large bank owned factoring company has a very inefficient sales ledger management policy with individual staff carrying a much higher workload than the independents with very little credit control done by telephone, relying instead on computer generated letters and tightly crossed fingers. It is no surprise that if the customers aren’t asked to pay, they won’t and it doesn’t take long before the original average credit period of 60 days has slipped to 70 days.

The decrease in the time taken to pay by customers will reduce the cost of borrowing from the independent factoring company whilst the increase in the average time to pay that will be seen with the large bank owned factor will result in the client having to pay a higher cost than originally forecast.

In the example shown above, whilst both factors have quoted the same rate of 2.5% over Base the actual borrowing cost from the bank owned factor will end up £2,704 more than the independent, which if expressed as a percentage of turnover will be 0.36%

The original offer from the bank owned factor was tempting as the factoring commission was 0.25% cheaper but as can be seen, appearances can be very deceptive and what on the surface appears to be the most cost effective route, frequently isn’t

Other side effects of poor sales ledger management include the factor reaching the recourse date when they ask for their money back, the imposition of re-factoring fees which can run at 0.5% to 1% per month on overdue debts and of course the increased risk of suffering even larger bad debts.

For a sample calculation of the sums involved showing in financial terms that there is much more to the cost of factoring than initially meets the eye please click on this comparison of factoring costs link or else the next page which deals with why some factoring companies offer such a poor service