Factoring Costs vs. Benefits

/ Costs

The basic costs related to factoring depend on the terms of the agreement you entered into with the factor. Additionally, a large workload will generally translate to higher costs (i.e. a small number of large bills will not cost as much as a large number of small bills would).

> Administration Charge

If you opt to have the factor take care of your sales ledger, you will have to pay an administration charge. The fee is based on a percentage of the total invoice value that the factor takes account for on your behalf. Administration charges usually range from 0.5 to 3.0%, although this may be subject to negotiation.

Even if you elect to let your company handle the debt collection and the sales ledger, there is will still be an administration charge, this time based on the load of work you generate for the factor.

There is also generally a minimum per annum. However, since this is out of the reach of companies with a small annual turnover, factors have recently introduced packages for small businesses that have smaller minimum fees per annum instead.

> Discount Charge

The money you borrow from the factor is levied a discount charge. Similar to traditional interest rates, this is based on a percentage about the Bank Base Rate. Interest is charged only to money borrowed while the invoice is outstanding, allowing you to minimize your interest charges if managed properly.

/ Benefits

The benefits of factoring are most apparent in the case of a growing business. As an enterprise expands, it tends to generate debts at a speed that outpaces its normal collection rate. A significant amount of its capital is caught in the bottleneck of debts to be collected and the factoring process allows this capital to be converted into usable funds. (Also, its good to keep factors in mind when taking note of the statistic that states that one in four of all business closures may be attributed to outstanding debt).

> Generating a Smooth Cash-Flow

Some businesses have their operations structured in such a way that they are highly dependant on prompt payments from customers in order to settle their own debts on time. Usually this is the case with businesses that deal with relatively fewer customers or if the demand for their goods and services is not regular (if the business is highly seasonal, for example). Factoring can help fix the cash-flow problems that can arise from those scenarios by effectively making available the capital caught in the bottleneck of unpaid invoices so that the company can address immediate expenses such as staff payroll, raw materials for manufacturing and third-party services essential to operations.

> Savings in Financial Administration

You can opt to have the factor take care of debt collection for your business. Often, this will prove to be more effective and efficient compared to your previous in-house collection facilities. This positive difference in efficiency can result in considerable savings in financial administration expenses.

Further savings in cost may also be realised by letting the factor handle your sales ledger as a whole, as this frees up management and administrative resources that were previously assigned to that task, resulting in higher overall productivity for your company by letting you re-assign your personnel to other more immediate areas of business operations.