The Effective Cost Of Factoring

Factoring is a service, and as a service, it has a cost. This cost is first for the one who delivers it, and after for the one who buys it.

To get a real estimation and a good understanding of the cost of Factoring, we have to look first and put together the operating expenses it answers:

1. Financial costs of bank overdraft or receivables discounting necessary to face the needs for cash
2. To the cost of work of people in charge of customers accounting management process (invoicing, payment reminder, dunning, etc.)
3. To the cost of Credit-Insurance or non-budgeted losses dues to unpaid invoices

The cost of Factoring

Classical Factoring cost estimation is based on the volume of financed invoices. In this consideration, it is different of other solutions such as one shot invoice factoring, or fixed rates factoring.

Generally the cost of Factoring is composed of three different elements:
1. Direct Financial costs
2. Financial Management costs
3. Other related expenses

1) Direct Financial Costs

It is directly linked to the outstanding financing, in other words to a contractual financing rate applied to a certain amount during a certain time.
This rate is technically made of a given reference rate (such as EURIBOR 3 month) raised of a margin. If the reference rate is negative, then the only margin makes the financing rate.

This financing rate generates interests that can be:
• Pre estimated and upfront charged: on the basis of the payments history, the Factor applies the financing rate to the financed amounts for it’s the average customer’s term of payment duration.
• Calculated on real realized figures and charged afterward: The financing rate is applied to the financed amounts and for the exact used duration.

Warning: Some Factoring contracts integrate a raise of the financing rate and thus in the global cost of the factoring operation in case of delay in the payment term. This raise applies generally after a certain while when the payment date written on the invoices is overpassed.

2) Financial Management Costs

Those costs are originated in the invoice’s factoring process in itself, the latest being made of time and expertise. This cost, generally called « Factoring Fee », is variable and is a percentage of the turnover bought by the Factor.

The commission fee’s rate is directly function of the chosen Factoring program as well as of the Factor’s missions. For example the commission’s fee rate corresponding to 5 Million euros of financed turnover will be higher in a classical Factoring contract than in a fully delegated factoring one.

There are of course explanations to that: In the first case the Factor finances the sold invoices, manage all payments reminding and dunning processes, the financial guarantee, and the whole management process (cashing, book keeping, accounting process, etc.). In the second case the Factor only finances the considered invoices, and delegates the customer account management..

1) Other related expenses

They result of the combination of all other remaining costs. Among others, let’s mention the monthly cost of access to the Factor’s internet platform that allows at any time updated figures reviewing (payments delays, detailed costs list, etc..). Here too can generally be found the proposed services and operation’s rate and fees.

In the case of new comers in the Factoring Services Market (the latest generally being independents, and not Banking Group’s subsidiaries) those other related expenses are gathered into a set called “Services Fee”

The role of the Trader

As an expert in enterprise’s finance, the factoring trader has generally a strong knowledge and experience in terms of cash management. He knows well all factoring solutions composition, and often is a credit-insurance expert too. This fully makes sense when considering that those two products (invoices financing and credit-insurance) are bound and complementary.

Then the factoring trader has to find and suggest the factoring solution that globally fits the best with your real needs (current and upcoming). By his ability to identify the best combination of contracts in each specific case and context, the factoring trader appears has a real added value consultant allowing his customers, tangible cost savings as well as cash flow optimization.

The cost of the trader’s services

It is surprisingly and literally a free service for the customer…
Indeed, the trader is paid directly by the Factor upon his own regular commission fee.


As a conclusion, one can say that using a factoring trader services is a real bargain for the customer.

• His role as well as his position of independent make of the factoring trader a strategic partner with no equivalent in the Banking Groups for the customers company.
• Due to the fact that he is judged upon the real benefits of his intervention for the customer company (savings, new developments, etc… ), he is by nature permanently committed to customer’s satisfaction.
• He acts as a free expert for the customer company since he is directly paid on the Factor commission fee.

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