what-is-factoring | Capital Office

What is factoring?

Factoring is to delegate the management of customer invoices to an external company (a factoring company, also called a factor) and to get an advance on its debts if the company would grant payment terms to its customers.

The mechanism of factoring is very convenient, but it is not free! How much is factoring? What type of society uses these services? Here we analyse the typical profile of a client company.

Factoring in detail

The mechanism of factoring includes several additional benefits, and several distinct costs!
First, the factor manages all or part of the business’ client account. The service involves monitoring and charging regulations, customers and raises the risk of default. “The commission factoring” encompasses all of these benefits, including the unpaid guaranteed.
Fees

The factoring fee to pay back the factor varies. Generally, the price to pay for peace of mind is based on the gross sales of the business, but also the volume of invoices to be processed or the reputation of debtors of the company.

The factoring fee is indeed a commission rather than a fixed charge. This will be deducted directly from revenues collected by the company.
Then, in the case of delayed payment, the factor provides an advance on debt, which can be up to 90% of the bill of the company. The latter then pays the factor, via a sort of “interest borrowing “, called “the funding fee”.

Lastly, most factoring companies add various fees, such as fees or additional voluntary benefits (audit, consulting etc.)
Factoring: summary of the costs

So with this cascade of costs, how much are the returns factoring? Some companies offer a factoring fee ranging from 0.5 to 2% of sales to manage.

Others have a more ambiguous billing that includes a factoring fee and other charges (various commissions, overhead …) of the total cost for all services, ranging from 7-15% of the amount plus VAT. It is advisable to make detailed specifications to control costs. In short, each factoring company uses a different method to calculate its price.

The benefits of factoring

Given the price tag, the benefits of factoring are many. The possibility to offload customer reminders and get cash advances are the primary benefits. If you look closer, factoring is a solution to outsource an entire department and the management of the account.

Factoring or discounting?

Discounting is a process that allows the company to sell its debt to its bank, which allows them a cash advance, with interest. The procedure involves the signing of a bill of exchange, subject to acceptance of the bank. Factoring is simpler, in terms of procedure and additional documents.

Factoring: Who is affected?

To benefit from economies of scale, we have to see its sales increase.

Factoring is typically for high-growth companies that do not have the time to organise their customer service and are thrown in at the deep end. The same goes for companies with multiple activities, wishing to delegate some, especially when they are deployed overseas.
Companies that perform substantial payment delays will have an incentive to seek a factoring company to better manage their cash flow and to discharge reminders. Traditionally, payment delays affect enterprises B to B (business to business) or activities for professionals (not individuals).

Factoring is biased towards “large and medium-sized companies”. To diversify their customer base and attract “small” companies, some factoring companies offer a flat-rate system, rated to the volume of invoices to process.
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