Determining the Factoring Fee
Having a good understanding of these costs will better prepare you to select the best transportation factoring company to work with.
Factoring companies take several essential considerations into account when determining the factoring rate to charge a company in exchange for its accounts receivables. There are numerous factoring companies serving a multitude of industries, therefore an array of rates and fees exist that can be difficult to analyze. Having a good understanding of these costs will better prepare you to select the best transportation factoring company to work with.
Typically, the factoring fee is deducted either from the advance or from the reserve. The rate paid by the client is determined by a number of aspects. The most important business characteristics that will affect the rate are:
- Type of Industry
- Debtor (Customer) Credit Status
- Invoice Volume and Number of Customers
- Day Sales Outstanding (DSO)
- About Fees
Figure 2-1: How the Factoring Fee is Determined
The correct term for factoring fees is “discount rate”. It may also be referred to as a “factoring rate”. However, because “factoring fee” is widely recognized as the common phrase, it is a term that will be referenced throughout this publication.
A factoring fee is not an interest rate for borrowing money, but rather a service charge for financing an invoice. The factoring fee is paid to cover more than just interest on capital. Included with the fee is due diligence by the factoring company on the trucking company’s debtors, verification of invoices and the disbursement of advances and reserves. Additional fees may also be associated with the factoring of invoices, depending on the invoice factoring company chosen.
Type of Industry
Certain industries are considered more unstable and risky than others. Trucking companies are typically assigned higher financing rates as the transportation industry is considered to be volatile business by conventional lenders. This can be mitigated by working with a factoring company that understands trucking well.
Look for:a factoring company that specializes in trucking to ensure the lowest factoring fees for your trucking company.
Customer Credit Status
The cost of factoring is very dependent on how creditworthy and stable a client’s customers are.
If a trucking company has credit worthy customers they are the ideal candidate for a factoring company. The cost of factoring is very dependent on how creditworthy and stable a client’s customers are. By hauling for reliable and creditworthy customers, a trucking company can be in a strong position to qualify for low rates. On the other hand, if working with customers who are not as stable, such as start-ups or customers with weak credit histories, factoring fees will be higher.
Look for a factoring company that will complete a credit audit of a customer base prior to committing to a factoring rate. This process will ensure that a firm rate will be established without encumbrance or credit restrictions. In many instances, trucking companies find themselves in a new relationship with a factoring company that introduces additional hidden fees and or credit limits due to the credit status of a client’s customers. Be sure to establish up front what customer invoices are pre-approved for funding and which, if any, are not.
Invoice Volume and Number of Customers
The less concentrated the customer base, the lower the factoring fee.
Size does matter! Trucking companies that regularly processes a high volume of invoices will qualify for lower rates. This is because the factoring company can concentrate back office resources more efficiently with less administrative work to direct funds.
Additionally, the larger the customer base, the more stable the revenue stream. Trucking companies with one or two customers only are considered to be high concentration and are more susceptible to risk. Lose the customer and you lose your business. Lenders, including factoring companies, are adverse to risk. Therefore the less concentrated the customer base, the lower the factoring fee.
Day Sales Outstanding
If a customer base has a relatively short DSO, factoring companies will offer lower factoring fees.
Accounts Receivable Turnover, or more correctly known as Days Sales Outstanding (DSO), is a measure of the average payment days of a client’s customers. The quicker customers pay their invoices, the more valuable they are. Therefore, if a customer base has a relatively short DSO (less than 40 days), factoring companies will offer lower factoring fees.
Learn how to calculate the DSO of your customers.
Copyright 2019, Accutrac Capital Solutions Inc.