The cost of factoring and invoice discounting

The cost of factoring and invoice discounting

The costs of factoring are usually reasonable. It's a competitive business with many suppliers so it pays to shop around.

Of course, cost should not be the only consideration. Quality of service is also important.

When signing any agreement check the notification period - most factoring companies require three months' notice if you want to end the service. However, some companies have notice periods of up to a year which could end up being expensive for you. If you are not happy with the notice period don't be afraid to negotiate.

Factoring is a complex, long-term agreement that could have a major effect on the management and development of your business. It is therefore advisable to consult your solicitor on the legal and financial implications of factoring.

Costs arise in two ways - interest and fees.

The rate of interest
Typical charges range from 1.5 per cent over base rate to 3 per cent over base rate. Interest is calculated on a daily basis.

These rates are roughly equivalent to bank overdraft rates and can even be better.

Credit management fees
There will be a fee for credit management and administration. The amount will depend on your turnover, the volume of your invoices and the number of customers you have.

Typical fees range from 0.75 per cent of turnover to 2.5 per cent of turnover.

For invoice discounting, typical fees range from 0.2 per cent of turnover to 0.5 per cent of turnover. These fees are less because only finance is provided.

Credit protection charges
These will be levied if it is non-recourse factoring, where the factor is liable for any bad debts. The amount will largely depend on the factor's assessment of the level of risk.

Typical charges range from 0.5 per cent of turnover to 2 per cent of turnover.