Effective Cost Of Factoring.
Effective Cost Of Factoring.
By Said Ul Amin | Submitted on 11 November 2022.
Factoring is a service, and as a service, it has a price. This cost is first for the person who delivers it and later for the person who buys it.
To get a true estimate and a good understanding of factoring costs, we first need to look at and collect the operating costs that answer:
1. Receivable discount necessary to meet bank overdraft financing costs or cash requirements.
2. Cost of work of people in charge of customer accounting management processes (invoicing, payment reminders, dunning, etc.)
3. Credit insurance costs or overdue invoices for unbudgeted losses
Cost of factoring.
Classical factoring cost estimates are based on the volume of financial receipts. In this sense, it differs from other solutions such as one-shot invoice factoring, or fixed-rate factoring.
Factoring costs typically consist of three different elements:
1. Direct financial costs
2. Financial management expenses
3. Other related expenses
1) Direct financial costs
It is directly linked to residual financing, in other words to the contractual financing rate applicable to a specified amount over a specified period of time.
This rate is technically increased by a margin over a given reference rate (eg EURIBOR 3 months).
If the reference rate is negative, only the margin forms the financing rate.
This financial rate generates interests that can be:
• Advance Estimates and Advance Charges: Based on the history of payments, the factor applies the financing rate to the financing amount because it is the customer's average payment period.
• Calculated on actual actuals and then charged: The financing rate is applicable for the amount financed and the valid term used.
Warning: Some factoring contracts integrate an increase in the financing rate and thus in the global cost of the factoring operation in the event of a delay in the payment period. This increase is usually applied after a certain time when the payment date written on the invoices has passed.
2) Financial management costs.
These costs start with the invoice factoring process itself, which is up-to-date with time and expertise.
This cost commonly referred to as the "factoring fee", is variable and is a percentage of the turnover purchased by the factor.
The commission fee rate is directly related to the selected factoring program as well as the factor's mission.
For example, the commission fee rate corresponding to a financial turnover of 5 million euros will be higher in a classical factoring contract than in fully assigned factoring.
There are, of course, explanations: in the first instance, the factor finances the invoices sold, manages all payment reminders and dunning processes, financial guarantees, and the entire administrative process (cashing, bookkeeping, accounting processes). , etc.).
Otherwise, the factor only finances the invoices in question, and the customer delegates account management.
1) Other related expenses.
They are the result of the combination of all other costs. Among others, let's mention the monthly cost of access to the Internet platform of the factor that allows the review updated data at any time (delayed payments, detailed list of expenses, etc.).
Here also the usual rates and fees for proposed services and operations can be found.
In the case of new entrants to the factoring services market (the latest are usually independent, and not subsidiaries of a banking group) those other associated costs are lumped into a set called "service fees".
Role of the businessman.
As a specialist in enterprise finance, factoring traders usually have strong knowledge and experience in terms of cash management.
He is well-versed in all factoring solutions and is often an expert in credit insurance.
This makes perfect sense when considering that the two products (invoice financing and credit insurance) are related and complementary.
Then the factoring trader has to find and recommend the factoring solution that best fits your real needs (current and future) globally.
With his ability to identify the best combination of contracts in each specific case and context, the factoring trader has a real added value consultant that allows his customers, tangible cost savings as well as cash flow optimization. Is.
Cost of merchant services.
This is an amazing and literally free service for the customer...
In fact, the merchant is paid directly by the factor on his own regular commission fee.
Conclusion.
In a conclusion, one will say that employing a factorization merchant service could be a real cut price for the client.
• His role likewise as his position of freelance create of the factorization merchant a strategic partner with no equivalent within the Banking teams for the shopper's company.
• because of the very fact that he's judged upon the important advantages of his intervention for the client company (savings, new developments, etc... ), he's naturally for good committed to customer satisfaction.
Tags
Article