Opportunity Costs: While this is not exactly a cost that is implicit in the factoring transaction itself, a business enterprise should consider the following:-Ī) The opportunity cost in case the business is not able to access the factoring solutions. In case of delays in receiving payments, the factor can charge overdue interest, that can be as high as 1-2% per month Overdue Interest: This is unique to recourse-based factoring programs wherein the obligation of ensuring repayment falls upon the seller. Drip Capital’s factoring service charges are among the lowest processing fees in the Industry. This ranges from 0.3% to 1% of the total amount. Processing Fees: Almost all factoring companies in India charge a processing fee, which is generally calculated on the total sanctioned facility. The interest rates is also sometimes referred to as the “Discount Rate” The rest of the amount will be paid once the factor receives the payments from the buyer. Depending on the indicative date of receipt of the trade payables, the factoring company (factor), will provide for some interest deductions + a buffer amount and will pay out only a percentage (%) of the invoice. Interest Rates: The most important cost element, the interest rates on factoring are generally calculated on a monthly basis and can range anywhere between 0.7% per month for good credit profiles, all the way uto 1.5% per month borderline credit profiles.In India, these are usually the costs to be considered in order to weigh the factoring service. In order to weigh the advantages and disadvantages of a particular factoring service, one of the most important aspects to consider are the costs. What are the Types of Costs involved in Factoring? We have covered the basics of factoring and how it works in an earlier post. At maturity, the factor collects payment from the customers and pays the remaining amount to the client after adjusting for fees.The factor extends advance up to 80% (or more) to the client upfront.
The client sells the invoices to the factor.The client sells goods to its customers (including exporters).A factoring arrangement works as follows:. The transaction is essentially a sale of an asset (the trade receivable) in exchange for immediate access to funds so a factoring facility can be availed by smaller-businesses over and above their current trading limits.įactoring is an asset backed financial tool for debt collection. Factoring, in finance, is an invoice financing technique that traders, both domestic and international, use to get access to cash by selling their assets (the receivables) to a third party financial institution, also called the factor.
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