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Factoring Rates can differ dramatically from lender to lender. We will have a look at what variables impact on the pricing of a factoring facility and then we will look at why some factoring companies are more expensive than others.

What impacts on the service fee?

The service fee is what the lender charges for administering your facility and it is typically determined by workload. This is dictated by the number of debtors you have an also the number of invoices you issue. Turnover also has a huge impact on your service fee and typically the higher your turnover the lower the percentage service fee.

The discounting fee, what impacts on this?

This is the cost of borrowing and it should reflect the risk the company is taking. The total fee is made up of the base rate and the margin. Some lenders use the Bank of England base rate while others use LIBOR. Watch out also for the minimum  base rates which a lot of lenders put in place. The margin is often dictated by their credit policies and with negotiation can often be reduced.

These are the 2 main fees but it is important to be aware of additional fees and charges. Always consider total costs when looking at different offers. Please also consider what service is actually on offer and ensure it meets the needs of your business. Factoring rates are obviously important but so are service levels and facility structure.

We have recently been approach by several businesses in and around Birmingham who are looking for factoring facilities. Being based in Birmingham has some serious advantages as it means that virtually every factoring company in the UK can service businesses there as they are so central in terms of location.

The challenge for any business based in Birmingham is choosing the right lender. Not all factoring facilities are the same – far from it. As most require a contract to be signed it is important you choose the right factoring facility and lender.

Invoice finance companies each have their own target market and this will be based on business turnover, sector, geography, debtor profile, etc.

Fixed fee factoring is ideal for businesses looking for a single flat monthly fee when factoring.

Research has shown that small businesses find factoring charges confusing and unpredictable. Fixed fee factoring takes away this confusion by combining all the charges into an easy to understand single monthly factoring fee. It is easy to budget for and provides a valuable boost for the cash flow of a small business.

It is ideal for a business with a fairly smooth cash flow. However, if your turnover is more variable you could find yourself paying the flat monthly fee in a month where you have not had any turnover in which case you would be paying for nothing.

An alternative to fixed fee factoring could be a bundled fee deal. This is a single fee but is charged as a percentage of each invoice with no minimum fees. It is arguably as easy to understand as a fixed fee deal but is more flexible.

We are often approached by companies looking for factoring companies in Leeds.

This request usually comes from companies who are in and around Leeds and want a local provider. Fortunately there are a good choice of factoring companies in and around Leeds. The right one for you will depend on the size of your business, your sector and your financial performance.

There are also a large number of factoring companies outside Leeds who are happy to help Leeds based businesses with a factoring facility.

Smart factoring Quotes would be delighted to help you find a suitable provider.

The Hidden Costs of Invoice Factoring

Typically an invoice factoring company will quote two headline rates – service fee and discounting margin. The service fee is quoted as a percentage and is applied to the gross value of each invoice notified. The annual service fee charged by factoring companies is therefore the percentage service fee applied to the gross turnover. The discounting margin is the percentage above the base rate that an invoice factoring company charges for the amount that they have advanced to you. The discounting fee equates to the interest rate that you would pay on an overdraft facility.

Beyond these headline rates are charges that are perhaps not so obvious and can make the comparison of facilities from different lenders quite challenging. These are a few of the charges that you should be asking about:

The base rate and minimum base rate. Some invoice factoring companies will quote over bank base rate while some will quote over 3 month LIBOR. It is important to understand how these differ and how they fluctuate. Some lenders will also have a minimum base rate which when base rates are very low come into effect. It is important to ask what the minimum base rate is as this can have an impact on the amount of discounting fees that you pay as a client.

Minimum service fee. All lenders will implement a minimum service fee and this can be set as a monthly, quarterly or annually paid fee. A major variable in calculating the service fee that you pay is turnover. If your turnover should drop dramatically and the invoice factoring company does not recover the fees they had expected then the minimum fee will kick in.

Audit fees are also charged by some lenders whereas as some other lenders include this as part of the service. If you are comparing costs and a lender is charging £500 a quarter for audit fees then it is important you are aware of this.

CHAPS transfers are transfers that allow you access to your cash on the same day. These costs can be significant as in many cases people will use these on a daily basis. These costs can vary from lender to lender and it is important to take these into account.

Arrangement fees are charged by some lenders and are a type of fee we are seeing creep into the pricing models of more and more lenders. It is important to remember that the service fee you pay is applied to the balance of your ledger when you commence so there is already a sizable fee to pay on day one. The addition of a separate arrangement fee obviously adds to this.

Legal documentation fees are charged by many lenders and again differ from a nominal sum to quite significant amounts. This can be on top of an arrangement fee.

Refactoring fees are charged by some lenders when they recourse invoices back to you as an invoice factoring client. That means that when an unpaid invoice ages beyond the funding period you have agreed with a lender they will pass this invoice back to you and charge you a percentage fee for doing so. This can be frustrating for full factoring clients because they have paid a service fee to a lender to not only provide finance but also the collect in invoices on behalf of the client. In this instance they are actually charging you more for not providing a service you have already paid for. The logic behind it is that it encourages you to get involved and help collect in the debt or at least provide them with information such as a proof of delivery to help the factoring company resolve any query.

To fully understand the list of charges of any individual invoice factoring company it is important to request a list of their disbursements.

In discussing the charges above it is important to remember that invoice factoring can be labour intensive for the invoice factoring company and if they are providing a good service they deserve to be charging a reasonable and fair amount for that service. It also important to understand what you are receiving for your money. In terms of credit control how does the lender you are speaking to go about the credit control? Some lenders will simply send out monthly statements and a series of automated letters and this may work for your debtors. Other lenders will telephone chase every invoice when it falls due and as such are providing a more hands on service and perhaps deserve to charge more for this. The question is what level of service are you looking for as a client?

The costs described above should also be offset against the time that an invoice factoring service frees up for the client. Will this time be focused on sales and growing the business? If so what are the additional benefits? In addition what can be done with the cash generated? Be entrepreneurial – if you now have an additional amount of money in the business what can you do with it? How much more money can you make with it?

The key is to understand what you will be paying for the service that you receive. By understanding all the potential fees you can compare the expected annual costs of each invoice factoring offer you receive. By also understanding what level of service is being provided you ensure you choose the offer that represents the best value to your business.