Cheap factoring: how to compare the different factors?

Cost of factoring: the elements of factoring pricing

Factoring is a financial technique that involves to transfer a company's customer invoices to a factoring company in return for a cash advance. In return, the latter receives two types of commission:

A financing commission

It is also known as factoring anticipation fee . It remunerates the factor for the cash advance granted to the company. The rate is indexed to 3-month Euribor. It is generally between 2% and 4% of the amount of sales transferred.

Factoring commission

In addition to financing, the factor offers other services: receivables management and credit insurance.

The factor can take on the administrative management of all or part of a company's customer accounts. It provides a wide range of services, such as

• Receivables monitoring ;

• Recovery ;

• Litigation management in the event of non-payment ;

• Etc.

On the other hand, the factor also offers a guarantee in case of non-payment .

The factoring commission is intended to remunerate the factor for these additional services. It is also known as service fee.

It can be set as a percentage of the total amount of invoices assigned, or as a flat-rate fee. The average factoring commission is between 0.2% and 2% of sales assigned.

In addition to these two types of commission, ancillary costs These include :

• Application fees ;

• Audit fees ;

• Notification costs ;

• Overriding financing costs ;

• Etc.

When talking about the cost of factoring, we can't overlook the fact that guarantee funds . They are returned to the company at the end of the factoring contract. a 5 to 15% holdback deducted by the factor from the amount of invoices assigned. This deduction is intended to enable the factor to deal with any insolvency of the company's customers.

All these factors need to be taken into account when considering and comparing factoring costs from one factor to another.

How do you compare the different factors?

To take out a cheap factoring contract, you need to find a factor offering the best value for money. This means comparing costs and other parameters.

Compare costs

As we have seen, factoring costs encompass a number of different elements. To compare two factors, you need to examine these different elements. The first step is to request a quote from 3 or 4 different factoring companies .

The idea is to find the one that the lowest bid for each euro financed . To do this, you can ask each company to submit their quotation to facilitate your comparison. For example, you can ask for the advance rate and the commission rate per 30 days.

So, for example, a factor may present his offer as follows: an 85% advance at a cost of 3.35% per 30 days. Another factor might offer a 70% advance at a cost of 1.5% per 30 days.

Since the quotes are presented in the same way, comparison is simpler. So it's easier to identify the best offer.

Consider other parameters

Comparing two factors on the basis of cost alone can be an ineffective approach. Moreover, a low factoring rate is not necessarily synonymous with low costs. There are other factors to bear in mind:

• Factor longevity . In other words, how long has it been in business? The longer a factoring company has been in business, the more trustworthy it is.

• Its clientele. You need to analyze whether the factoring company works with companies of your size. You also need to make sure that the factoring company works with companies in your sector of activity. This will enable them to better meet your needs and expectations.

• Minimum thresholds for accepted invoices. Some factors set a minimum monthly factoring volume. If this threshold is not reached, the company is exposed to financial penalties. Make sure you are comfortable with this threshold before signing a factoring contract.

In recent years, factoring has become increasingly popular with SMEs. In particular, through online factoring . With this type of factoring, companies can quickly assess online whether a factor is suitable or not. What's more, it allows companies to assign their invoices only when they need them. This type of factoring avoids the minimum thresholds imposed by some factors.

What's the low-cost alternative to traditional factoring?

Looking for a less expensive factoring solution? Consider Hero . It is a B2B payment solution which advances you the amount of your invoices within 24 hours of their issue.

This means a modern, fully digital factoring solution . It offers instalments and deferred payment Your customers can pay their invoices in 3 or 4 instalments, or after 30 to 60 days. However, the platform pays you an advance of up to 80% of the invoice amount.

Then, when receivables are collected, Hero deducts its costs and the amount of the advances, and pays out any surplus.

You can proceed in the same way for your supplier payments. You can pay in 3 or 4 instalments, or defer payment while the platform advances payment to your suppliers.

How to negotiate and reduce costs?

Here's our advice on how to reduce the cost of your factoring contract:

• Negotiate . It's true that factoring is now a regulated business. This means that commission rates are more or less the same from one factor to another. However, it is still possible to negotiate for each type of commission, and especially for ancillary costs.

• Optimize your accounts receivable . It should be noted that the amount of commission set by the factor depends on the level of customer risk. The more the factor fears about the creditworthiness of the company's customers, the higher the rate it will set to cover itself. So, to keep costs down, it's important to limit customer risk.

• Compare offers from different factoring companies . It's important to evaluate the price/quality ratio from one company to another. Look at the content of each offer and find the one best suited to your company's needs.

So finding an attractive factoring offer requires a real comparative approach. Focusing on the price/rate ratio alone seems to be the wrong approach, as other parameters also need to be considered. Hero offers a real alternative cheap factoring innovative, flexible and adapted to SMEs and VSEs.

Other articles on the same subject:

• How much does factoring cost and how can I calculate it?