Factoring fees are often hard to calculate because there are so many variables and potentially hidden charges. Let’s look at each element of the factoring fees and understand how to calculate them:
Factoring Service Fee - this is typically quoted as a percentage such as 1%. This fee is applied to your gross turnover. So if your annual turnover including VAT is £1m then your annual service fee is £10,000.
Minimum Service Fee – it is important to check your factoring contract or terms because there will usually be a minimum service fee. Using the above example if the minimum service fee was £12,000 then this is the service fee that would be paid. The calculation above would only become relevant if the gross turnover was above £1.2m.
Retro Fee – it is important to remember that at the commencement of the facility the service fee will be applied to the gross value of your debtor book. If your debtor books is standing at a gross value of £250,000 and the service fee is 1% then the retro fee will be £2,500.
Discounting fee – this is the charges applied to what you borrow. In simple terms it is the base rate plus the margin multiplied by the average borrowing. It is important to check for a minimum base rate. Do not assume you are borrowing over the Bank of England base rate. If the minimum base rate is 3%, the margin is 2.75% and the average borrowing is £100,000 then the rough discounting fees payable are £5,750. Please, please, please remember to check for the minimum base rate.
Arrangement fee – this is a fee that is charged to set up the facility. It is important to check this as it can be significant. This is certainly an area to negotiate as they are a fairly new feature in factoring agreements as the retro fee was thought to compensate for upfront fees.
Survey Fee – some lenders will charge to do a pre lend survey before making a formal offer while others will do this free of charge.
Audit Fees - some factoring lenders include the cost of audits within the service fee while other charge in addition to the service fee. It is important to check this.
Disbursements - some lenders have a list of disbursements as long as your arm. Please ask for a list of disbursements from any prospective lender and try to anticipate which services you may need over the course of a year.
Total Cost in Year 1
Service Fee or Minimum Service Fee +
Retro Fee +
Discounting Fee (remember minimum base rate) +
Arrangement Fee +
Survey Fee +
Audit Fees +
Anticipated Dispursement Fees
Please remember that not all lenders charge all of the above fees. Please also remember that just because they are not mentioned in the initial indicative terms you receieve does not mean they do not apply. You must ask the question and check all the small print.
Is it worth it?
Well that depends on what you can achieve with the additional working capital. I would suggest doing a P&L forecast and a cashflow forecast both with and without the facility. That will show whether or not the facility is worth taking up or not.
If you have any questions please contact us. Our approach is not a sales approach. We simply explain the pros and cons of each option available to you and allow you to make an informed decision for yourself and your business.