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Invoice Finance Providers
Factoring: Understanding factoring rates
Before benchmarking factoring service providers, and the prices of their offerings, it’s important to exactly understand how factoring rates apply, to get a full picture of factoring costs. Pricing bases include both information about the business itself, its clients, and information about submitted invoices.
Factoring rates may include factoring fees and interest charges - which must not be confused with interest rates - or discount rates. At the end of the day, both models make for very different overall factoring rates.
Factors will base their cost estimates on risk: therefore, they need to know quite a few things about your business, your clients and your invoice to make a reasonable appraisal of this risk and propose matching factoring rates.
Factoring rates are based on key company metrics...
Although factoring arrangements are not loans, factors need to have an idea of how and when the invoices they are sold will be paid.
They will therefore require businesses to provide information such as:
- Annual sales volume - factors will simply not work with businesses reporting turnovers under several ten or hundred thousands of pounds;
- Client origin - whether these customers are based nationally, or internationally, how diversified they are...;
- Average invoice size;
- Stability and creditworthiness of your customers.
... and payment terms
Factors then need to know more about the invoices, namely:
- Payment terms - when the invoice is supposed to be paid;
- Average payment cycle - when invoices to these specific customers actually get paid.
Discount rates, interest rates and factoring fees...
The confusing part is the several fees included in factoring rates, as depending on the factors and the pricing model they use, some fees will be levied, and some will not. Also, some fees may look like APR interest rates... but they’re not.
Factoring fees, or factor fees, are the percentage of the invoice value that discount factors require to release cash for their clients. These fees are based on the invoices they have been sold and which are due to be paid later by the end client, typically within 30 days. They are paid once and for all, they’re not interest rates but transactional rates.
Some factors may also charge interest charges or interest rates, which indeed very much work like interest rates, on top of the factor fees. Interest rates will not change no matter when the end-client ultimately pays the invoice.
Many factors use another model where factor fees are replaced with discount rates: client pays 3% for the first 30 days, 1% for every 10 days thereafter, and so on. In this “hybrid” model, there are generally no interest charges.
Example of typical factoring rates
For this example, the invoice value will be £1,000, paid 45 days after issuance.
Factoring fees with interest charges model
- Factoring fee will be 3%, so £30;
- Upfront payment by the factor of £800 - advance rate is 80%;
- £800 are advanced over 45 days at 12% APR - £12 interest charge;
- Total cost is £42 in factoring rates.
Discount rates model
- Same factoring fee of £30 for 30 days;
- 1% additional factor fees for 10 extra days - £10;
- 1% additional factor fees for 5 extra days - another £10;
- Total cost is £50 in factoring rates.