The factoring industry is a highly fragmented industry funding over a trillion dollars of receivables worldwide. The parties originating these transactions include factors, re-factors and brokers. Many, if not all of the brokers, are likely just generating leads and are not direct lenders. All else being equal, the lowest rates are available from the direct lenders. The role of a broker is to make sure a client finds the best combination of rate and program terms.
Factors make money a variety of ways - some by charging origination fees, some by charging interest, some by charging both. Yield enhancements include instituting "float days" and reserve accounts. Various other fees can also add to the bottom line.
The factor is trying to achieve a yield which reflects the risk of non-collection it is taking - whether it be the creditor (borrower) risk or debtor (ultimate customer) risk. As their cost of funds may be high, a factor will have to charge a much higher rate to achieve its net income goals. The result - the cost of factoring typically ranges from 2.0% per month to as high as 4.0% per month. Only strong creditworthy borrowers generating significant monthly volume can see factoring rates which begin to approach the cost of traditional bank financing.
Prepare carefully before getting into the factoring business - not only do you need to have a cost of funding that will permit you to price competitively, but you need to know how to evaluate credit, track and monitor collateral, understand collections procedures and legal requirements and develop a diversified portfolio of accounts. Fraud detection is another skill factors need to have.
I hope this addresses your questions!
Excellent summary. Thanks for the information.
You may want to check your state banking laws. Commercial financing is a regulated activity. In your state, you quite likely might not be able just "assume" the role of broker. You may need to be duly licensed in order to legally do so.
Unless it`s your intent to build a business as a direct lender with the goal of accumulating a diversified portfolio, I wouldn`t recommend that you factor your one client`s receivables.
If I can help your client with a funding need, I would be happy to speak directly with them.
Hi MarkB thanks for this update and got the best idea but i also want to say something that is factoring corporations pay eighty p.c of the invoice worth direct. Then they issue the remaining value--minus a resolution fee--once they've receive payment from your shopper. The resolution fee is decided by a mix of the credit good of your client base, the common terms, the invoice range and size, and resolution volume.