So, what is the real cost of the facility?

By Key Factors - Mar 21 2022

Invoice factoring can improve cash flow and free up time and resources. There are many different types of businesses in various industries and situations that use invoice factoring. Which is why invoice factoring fees can vary greatly. Many of our clients come on board with us here at Key Factors, frustrated by the lack of transparency with other invoice factoring providers.

Invoice factoring was traditionally a product offered by the non-banking sector, however, in the last 20 years, the banks have jumped on board, seeing the potential money to be made in fees. Large financial institutions like banks do still assess your business using their credit underwriting standards, which only looks at the quality of the business to meet their lending ratios, not the quality of the customers buying your product. Additionally, banks tend to charge an interest rate for the money out the door and a buying fee for the invoices initially purchased. Often, you will be required to do all your business banking with the same institution to qualify for these products, which introduces a range of other fees attached to your accounts and factoring facility. Due to the way banks manage the facility, you will notice they refer to the product as invoice discounting as opposed to invoice factoring.

While banks are usually deemed to be leanest when it comes to pricing as they have the cash reserves to do so, your business still needs to qualify under their standards. This means many small to medium sized businesses would unfortunately not qualify as most banking invoice discounting facilities focus on the larger business sector.

Banks may often have a lower interest rate for the funds in use, but they also have a buying fee which may be capped (around $80,000 p.a.), because it is hard to justify this fee constantly growing as a percentage of turnover when there is also the interest component, activity fees, line fees, unused limit fees and other account fees to consider.

The banking model for invoice discounting has created an issue where many non-bank lenders in the factoring space have copied the model of multiple fees as it benefits their bottom line. Many of these lenders have a ‘cost of funds’ – a borrowing cost that they incur and need to cover.

The majority of these lenders borrow money and then lend it and as such need to cover the costs of doing so. With a simple fee structure this is more difficult to achieve. So, what has evolved is that many of our competitors have adopted multiple fees within their factoring facilities that reflect what the banks are doing.

It is not uncommon for us at Key Factors to see businesses who are currently factoring elsewhere and exploring alternatives. We often hear from these businesses that they can’t get a simple answer on the cost of just one invoice. Through our research into our competitors’ practices, we have found some common fees being added into their invoice factoring:

• Management fee / invoice buying fee: a fee charged on the purchase of the invoices being factored. The majority of lenders now require all invoices raised to be processed through the facility and as such this fee captures each and every one and will vary based on the deal size or level of turnover.
• Interest rate: the interest rate will be applied to the funds in use or drawdown. As the majority of lenders have a cost of funds, this interest rate will always be higher than that offered by the banks. We have seen in recent times this being as high as 10%-15% (3 times that offered by some bank facilities).
• Unused Limit Fees: to offset the savvy client who manages the funds in use to minimise interest, a number of lenders now have unused limit fees. This fee funds the gap between the money being used and the facility limit set.
• Audit fees: an audit is a field review that the factoring company may conduct at a desired frequency ranging from monthly or quarterly to every six months. The audit cost could be as much as $1,000 per auditor, per visit.

In addition, there may be credit note fees, older debt fees (overdue accounts), overdrawn account fees, establishment fees, application fees, limit increase fees, legal fees, annual review fees, credit reference fees, insurance fees, misbanking fees etc. With all these fees considered, it’s no wonder it is difficult to get a simple answer about how much it costs a business to factor.
That’s why we’ve set about to provide some more clarity on our product offering and fees. We offer:

• A simple flat daily discount charge of 0.1% is applied to invoices factored. As an example, a $1,000 invoice would cost $1.00 per day and is applied for the time the invoice(s) is/are outstanding between you (our client) and us, as opposed to you and your customer. The minimum factoring period is only 14 days.

There are no minimum or maximum required volumes associated with this facility. You can use it if and when required to fill the gaps in cash flow that occurs from time to time.

It is quite simple to then calculate the cost per invoice because we do not lend money at a rate of interest. We purchase invoices at a discount and charge as a percentage discount from the face value of each invoice. There is no third-party cost of funds that needs to be covered.

As many business owners and financial professionals treat factoring discount rates as interest rates on a loan, they come to the incorrect conclusion that factoring is too expensive, which is simply not the case with Key Factors.

If a business sells $100,000 worth of invoices to Key Factors, the fee is $100 per day (minimum 14 days). If the invoices are paid in 30 days, the total cost is $3,000 or a 3% discount. The tendency is to take the 3% fee, multiply it by 12 months and think that that’s an annual return of 36%. This is incorrect! Our charge was 3% on that sales transaction alone, noting that the invoice(s) were paid at 30 days.

Think of it this way – it really isn’t any different than if you were to sell your own product or service to a client at a discount of up to 5% subject to promptness of payment.

Since 1989, Key Factors has been a trusted cash flow partner for businesses with a monthly turnover of $50,000 or more. We are proud to offer exceptional customer service, a transparent fee and fast and flexible funding to meet your ever-changing business needs. Contact us today to learn more about how invoice factoring can be a great finance strategy to help your business grow.

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