Factoring: how much does it cost and how to calculate it?

How is the cost of factoring calculated?

Factoring is an attractive alternative to bank loans. However, you need to assess the costs involved to determine whether it is suitable for your financial situation. These are generally around 5% of the amount of invoices assigned .

Calculation principle

The costs associated with the factoring operation can be broken down into three components:

Factoring commissions

In addition to financing, factoring includes other services:

• Administrative management of customer workstations . Depending on the type of factoring contracted, the factor can manage all or part of the company's accounts receivable (reminders in the event of late payment, debt monitoring, collection, pre-litigation and litigation in the event of non-payment).

• Credit insurance (receivables payment guarantee). These fees are intended to enable the factoring company to cover any unpaid invoices in the event of customer insolvency.

The factoring commission is used to remunerate these additional services provided by the factoring company. It is also called service fee . It is determined in percentage form on sales managed by the latter.

The factoring commission can also be set at as a package . This is based on the number of invoices transferred and their volume. The flat rate can be charged monthly or quarterly.

In any case, the amount of factoring commissions depends on various parameters:

• The volume of sales managed by the factor ;

• Location of debtors (in France or abroad) ;

• Average invoice amount ;

• Number of customers ;

• Average settlement time.

The average factoring commission is between 0.2% and 2% of the total amount of invoices assigned.

The financing commission

The financing commission is also known as factoring commission. It is indexed to Euribor over 1 or 3 months, and is intended to remunerate the factor for its cash advance. The financing commission is to factoring what interest is to bank loans. This is why we can also speak of interest expense .

Three factors go into determining it:

• The amount of the cash advance ;

• La duration of advance. This is the period of time between the advance date and the invoice due date. The longer the period, the higher the financing commission.

• The interest rate.

The financing rate is generally between 2% and 4%.

Additional costs

These are charges relating to various operations and services rendered by the factor, such as :

• Application fees related to the signing of a factoring contract ;

• Notification costs customers to inform them about setting up a factoring contract;

• Audit fees for validation of a new customer presented by the factor (the company assigning the invoices);

• Litigation costs in the event of a legal dispute ;

• Overriding financing costs in the event of a request to benefit from conditions derogating from the initial contract ;

• Etc.

Even if you can't really talk about costs, guarantee funds are also worth mentioning here. This is a deduction made by the factor from the amount of invoices assigned, to serve as a reserve in the event of non-payment. It is also known as retention money . It amounts to 5 to 15% of the amount of invoices assigned.

Concrete examples

Here are two concrete examples to give you a better idea of factoring costs.

Example 1

Let's take the example of a company with sales of 50,000 euros entrusted to a factoring company X. As we now know, the cost of the operation breaks down into two parts: The factoring commission and the financing commission.

In our example, the factoring commission is 0.6%. The financing commission is set at 3%. This gives us a rate of 0.5% for two months.

Here's how the total cost of factoring is calculated:

(50,000 x 0.6%) + (50,000 x 0.5%) = 300 + 250 = € 550

Example 2

Let's take the example of a company transferring 75,000 euros in sales to the factor. The factoring commission is set at 0.4%. The financing commission is 1.5%.

Here's the calculation:

(75 000 x 0.4%) + (75 000 x 1.5%) = 450 + 150 = 300 + 1 125 = 1 425 euros

How to lower factoring rates?

Here are our tips for enjoying the benefits of factoring at lower cost:

• Optimize customer item management to limit customer risk. If the factor considers the risk to be low, it will set a lower commission rate for you. You can do this by assigning the invoices of your strongest customers, or by optimizing your dunning policy.

• Negotiate . Factoring costs are negotiable.

• Compare different factoring companies. Costs must be roughly the same from one factor to another. It is the content of the various offers that should serve as the criteria for comparison. The aim is to choose the best offer at the best price.

What if it's too expensive?

It's true that factoring is a financing solution that provides companies with immediate liquidity, but its costs can be high, especially for very small businesses. You're looking for a fast, flexible alternative to factoring. Our Hero payment solution offers the advantages of factoring, without the drawbacks.

Hero propose deferred payment and payment in 3 or 4 instalments . This means you can extend payment terms to your customers. However, you won't have to wait for due dates, as the platform will advance payment immediately As a result, you reduce your outstanding receivables. What's more, you benefit from immediate liquidity to finance your working capital requirements.

Factoring is therefore a financial operation whose costs can be considerable. Between the financing commission, the factoring commission, ancillary costs and the guarantee fund, the bill can be high for very small businesses. By advancing payments on invoices issued, Hero is the ideal alternative for avoiding factoring costs.

Other articles on the same subject:

• Factoring: what is it and how does it work?

• Spot factoring: definition, advantages, operation

• Factoring for very small businesses: Hero makes it easy to finance your invoices

• SME factoring: finance your invoices easily with Hero

• Factoring for training organizations: Hero makes it easy to finance your invoices

• Online factoring: finance your invoices online with Hero

• Factoring contract: definition and how to draw it up

• Factoring company: what is it and what is it for?

• E-factoring: what is it?

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