Factoring Costs
The 10 Most Misunderstood Cost Drivers
Invoice Factoring Facility Fees and Minimums
Joe Sillay
Executive Vice President
Federal National Commercial Credit
This outline is the seventh, accompanying each in a series of eleven videos intended to help you
understand pricing common in the specialty finance industry of invoice factoring and asset based
lending.
Facility Fees
A Facility Fee is a charge to set up the borrowing or factoring relationship. Most often, it is
expressed as a percentage of the maximum facility or line amount to be provided. For
example, if there is a 1% Facility Fee and the finance company has proposed a line amount
up to $500,000, then the Facility Fee would be $5,000. Typically, this fee is due up front or
is taken out of the first advance. Some finance companies will agree to take the Facility Fee
in installments.
The costs:
A 1% facility fee adds 1% to the annualized cost
If cash is short, payment of the fee can be a burden
Minimum Fees
There are several types of minimums. Minimums should only come into play when your
activity falls below your projected volume and even then, if the fee operates as a true
minimum, you only pay the amount you did not cover with activity. Here are two common
minimum structures:
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Minimum monthly financed volume
If your financed volume falls below the stated minimum, this fee provision might specify that
you owe the financing fees that would have been charged if you had financed the minimum
volume of invoices.
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Facility Fees and Minimums
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Example:
Minimum Financing Volume of $250,000
A “factoring” fee of 1.5% of financed invoices
Actual financed volume of $150,000
Shortfall against the minimum of $100,000
Minimum Fee Charge = 1.5% X $100,000 =$1,500
In addition to the $2,250 accrued on the $150,000 actually financed.
Minimum monthly fees
Very similar to the first but based upon fees charged rather than financing volume.
If the fees on the financing provided in any month are less than the monthly minimum fee,
you would be charged the amount of the shortfall.
Example:
Minimum Monthly Factoring Fee of $4,000
A quoted Factoring Fee 1.5% of financed invoices
Actual financed volume of $200,000
Accrued Factoring Fees on the $200,000 = $3,000
Shortfall against the minimum of $1,000
Total Factoring Fee Charged = $1,000 shortfall plus $3,000 accrued fees =
$4,000
Why do these fees exist?
In most cases, the finance company is trying to insure they cover known costs, such as:
Account setup and due-diligence
Reserving capacity for your line
Payments to the broker or consultant if you were using one
Economies of scale – pricing risk
Facility Fees and Minimums
Copyright © 2012 Federal National Commercial Credit
Conclusion
Factoring and asset based lending agreements may specify “Facility Fees” that add to the
overall cost of financing by their effective amount. More important may be the cash
requirement to pay a facility fee if cash is tight.
Minimum Fees may or may not add to the cost of your financing. It really depends on how
the minimums are specified and whether or not you are likely to engage those minimums.
Read the governing financing agreements carefully and understand the way all fees will
operate. Think carefully about your business and whether or not you can expect to engage
minimums. If you think your financing and business patterns may frequently incur minimum
charges, it is important to realize that those charges could meaningfully increase the
effective overall financing rate you are paying.
If those minimums are set below where you expect your activity to be, the minimums will
probably not affect your effective rate at all.
Watch more videos in the series on invoice factoring costs on Federal National’s blog or in the
video library. Follow us on twitter, LinkedIn or Facebook or subscribe to our blog to know when the
new videos are released.
Copyright © 2012 Federal National Commercial Credit.
Facility Fees and Minimums
Copyright © 2012 Federal National Commercial Credit