Understanding Factoring Costs

Factoring costs can be quite difficult to understand if you do not know what to look out for. There is a page on the site advising people how best to minimise factoring costs. I thought it might be an idea to look at what fees you should be aware of when looking at setting up a factoring facility or comparing factoring quotes.

Service fee – this is usually quoted as a % fee that is applied to the gross value of each invoice. The annual cost is calculated by applying it to your gross annual turnover. If the service fee is 1% and your gross annual turnover is £1m then the service fee will be £10,000. Please be aware of minimum fees. Please also be aware that this fee will be applied to the value of the ledger at take on. Some lenders will quote a flat annual fee.

Discounting Fee – this is essentially the cost of borrowing and is quoted as a % over base rate. Please look out for what base rate is being quoted (i.e. Bank of England Base Rate or LIBOR) and please understand if their is a minimum base rate that applies.

Arrangement fees – this is a fairly new practice where lenders are charging an arrangement fee.

CHAPS fees – this is a charge for same day transfers to you from the factoring company. I have seen these range from £7.50 – £40.

Audit Fees – lenders may undertake periodic audits on your business. Some lenders offer this for free as it is covered by the service fee. Others charge seperately for the service. It is important to consider what each audit costs and what the frequency of those audits will be.

Survey Fee – some lenders will charge you for a prelend survey.

Minimum service fee – lenders will typically quote a minimum service fee. Should your turnover multiplied by the turnover not generate the minimum fee this minimum fee will be applied.

Minimum Base Rate – as mentioned above lenders will quote the discounting fee as a % above base rate. However, some lenders have a minimum base rate of say 3%. If the base rate used is below this then the minimum base rate will apply.

This is in no way an exhaustive list of fees. It is important you understand all the fees that will be applied before signing up for a factoring agreement. Ask your lender for a full list of fees/dispursements.

 

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