Factoring is today the preferred financing method for banks. However, it comes at a high cost. Here are some ways to cut factoring costs.
Banks today primarily offer factoring as a short-term financing method, but factoring is expensive. The cost averages around 7 to 15% of the money loaned.
Why such a range? Mainly because factoring is a mode of financing with drawers. It of course includes the financing itself, but the bank can also offer credit insurance and the reminder service for your customers. Depending on the scope, of course, the cost will not be the same.
What are the main factoring costs?
The factoring commission
It corresponds to the work that the bank is doing as part of this financing. At a minimum, the work is to process the invoices and their payments, but there may be the management of credit insurance and customer reminders. You understand that the cost will be different.
The financing commission
It is generally calculated on Euribor plus a margin. This will be all the more important as your risk is considered high.
Everything that the bank will charge you such as access to the website, the cost of taking into account a new customer account, the cost for a change in the guarantee limit for a customer, etc.
Companies must, therefore, be very attentive to the costs of their factoring. They are not deprived, but this requires the establishment of an action plan. This action plan will also have positive effects on the management, results, and cash of the company. It is therefore particularly interesting to tackle it. The three key steps are preparation, negotiation, and follow-up. We will only talk about the most significant elements here.
What the factor asks is nothing more than what it is necessary to do in the context of good management of your business. So the better the management of the company and in particular the customer cycle, the lower the banker will consider the risk. Its financing margin will be lower with a better cost for you.
As an example, here are some points the bank will look at:
If the order is written; that it is checked upon receipt as to prices, quantities, delivery date; that in the event of a discrepancy, the customer is contacted so that an agreement can be found and that this agreement is materialized in writing, then the order is perfectly secure.
The risk of litigation is low. On the other hand, if the order is only oral, if there is a difference in price, quantities, or other nothing is done, the risk of litigation will be much greater.
Each activity has its own constraints and the perfect tour is not always possible. On the other hand, it is always possible to analyze it and put in place the appropriate tools to secure it as much as possible.
This must be organized. The more effective it is, the less financing you will need, the lower the banker will consider the risk. Indeed, a good follow-up makes it possible to quickly detect the customer who does not pay and to deal with the problem more quickly. If there is a dispute, it will be easier to deal with, because it will be more recent and therefore the protagonists will remember what happened. If the customer is unable to pay, deliveries stop and the slate does not continue to swell. The risk is better controlled.
Preparing therefore means analyzing the entire customer circuit from prospecting to collection in order to know the strengths and weaknesses. A good knowledge of the weak points, will allow to put in place corrective actions that you can present to the banker.
Preparation is also about choosing the customers you are going to sell. Indeed, in a client portfolio, there are always clients who are financially strong and others who are more fragile. It is preferable to give the bank invoices for customers with the best risk profile.
It is also important to understand how his company works in relation to its customers and necessary to have statistics such as: the number of customers opened per year, the number of times the guaranteed outstanding lines are modified … This will give a statistical basis to negotiate all ancillary costs.
Preparation is essential. It prepares and facilitates the negotiation work to come. Likewise, having cash flow forecasts makes it possible to know the amount of financing required and to position yourself at the right level.
My purpose is not to tell you how to negotiate, you know that, but to draw your attention to a few key points:
- Put the banks in competition, but by limiting the number. Three or four are sufficient. Challenging your usual banker can be good as long as you put him in competition with other banks.
- Create a reading grid. Each of the banks will present their rates in their own format. You need a way to compare the different costs and at the same time calculate the overall cost. This grid will be a powerful negotiating tool, as it will highlight the gaps. It is on them that we will have to rely on because they constitute your negotiating margins.
- Negotiate everything and not just the factoring and financing commission. Even though the costs individually are low, in total over the year slate can be heavy.
The best contract is now negotiated but the job is not finished. The functioning of the contract is also essential.
Factoring should be followed like milk on the go. It is not because we assigned invoices to a bank that we got rid of the problem, on the contrary.
The priority is to ensure that the accounting and that of the factor are in phase. Be careful not to let the situation get out of hand at the risk of not being able to control what the factor is doing. The consequences will be at least to lose funding, at worst to lose money through debts that would not be recovered and costs that would be excessively expensive.
The other absolutely essential point is to continue working on the customer cycle as if there was no factoring. The more efficient the customer cycle, the less money you will need, the less the factoring will cost. The work that started upstream of the negotiation must absolutely be continued.
Negotiating your factoring contract well is not easy, but it allows you to earn 2 or 3% or even more on the cost invoiced by the bank. In reality, the gain is even greater, because by working the customer cycle and optimizing it this will have a positive impact on cash and results.
You should therefore not hesitate to negotiate a factoring contract. Brokers can do this for you on the negotiation part, but be aware that they are paid by the bank for the duration of the contract.