Calculating the Differences in Cost between Factoring vs Hiring a Credit Controller

For many businesses, especially those in the medium and smaller range of concerns, there is a continuous drive to make savings where possible whilst maintaining utmost quality of the products and/or services that the business offers.

woman with credit cardsSometimes, however, savings can come in unexpected forms. For example, businesses unfamiliar with factoring might assume that the process will cost them more money than they will gain – much like taking an emergency loan that results in repaying much, much more than the business borrowed.

Because of this, some businesses might consider hiring a credit controller to chase down clients and ensure that the inflow of cash stays healthy. Whilst this may seem like a cleaner, cheaper solution for the business, the sums do not add up this way.
Reasons for Factoring
For many businesses in today’s still somewhat shaky economic environment, quick access to funds is often a disheartening affair. Banks are reticent to lend, even to businesses that have good prospects and track records, in the fear that the economy will buck once more and their loaned money shall disappear.

Small and medium-sized businesses then find themselves in a torrid situation; with no cash to expand or introduce new products or services, their business stagnates, making them even more unattractive to investment. For many, factoring is the answer.

The ability to unlock capital bound up in invoices lets the business access much needed funding, without saddling themselves with debt or punishing repayment schedules. Below, we will look at the real costs of factoring and how they compare to those of a hired credit controller. 

  • Accessing funds from traditional lending streams is still tough for many SMEs
  • SMEs then find themselves trapped at a certain size without being able to grow
  • Factoring helps SMEs access funds generated from their own business, without punishing and restrictive bank loan repayments

Real Costs

In factoring, there are two main costs that business should be aware of – fees and interest.

Interest charges generally fall between the range of 1.5% to 3% over base rate. The level of interest usually depends on the size of the business, the value and quality of its invoices and a couple of other factors.

The attendant fees of factoring can range from 0.5% to 2.5% of turnover. These are such as, in a factoring arrangement, the factor also takes on the role of a credit controller. This means that the factor is providing a dual service of lender and sales ledger administration in one service. Again, the level of fee will depend on the size of the borrowing business, the value of invoices to collect and, in many cases, the ongoing history between factor and business – those business that enter long-term relationships with a factor will likely see lower fees.

If a business enters in a non-recourse agreement with the factor – meaning the factor bears responsibility for bad debts – there are additional fees that usually range from 0.5% to 1.0% of turnover. The level of fee will depend on how risky said debts are.

  • Factoring interest fees fall between 1.5% to 3.0%, depending on the size and value of the business’s receivables
  • Fees range between 0.5% to 2.5%, reflecting the dual role of lender and credit controller the factor takes on
  • A non-recourse agreement – protecting the business from bad debts – might incur fees of 0.5% to 1.0% of turnover
  • A good factoring company can usually reduce the accounts receivable period to a shorter amount of time

Hiring a Credit Controller

As an alternative to factoring, some businesses might hire a credit controller to manage their receivables.

The first point to consider is that collection of receivables is going to take longer with a credit controller that it would with factoring. This is partly because a credit controller receives their fee no matter what; therefore, there is less of a driving incentive to collect receivables as quickly as possible.

The major difference between factoring and hiring a credit controller comes in the form of the cash outlay or hiring the controller. Whereas a factor relies on successfully collecting receivables, a credit controller only relies on the fee paid by the business.

Hiring a credit controller will cost a business around £18,000 per annum, with a sales ledger clerk costing the business £13,000 or more. This represents a large annual outlay, but without the safety net and assurances that a factor can offer.

  • Credit controllers often take longer to process and recover receivables
  • A credit controller, with their base fee, has much less incentive to collect receivables as quickly as possible

The slower collection period and yearly outlay for a credit controller makes factoring, with its fluid fees and available protections against bad debts, offers more protection and return on money spent than a credit controller does can.

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