Understanding Factoring Finance Fee: What is it and how it is Calculated?
Table of Contents
Introduction
Factoring finance is quickly gaining popularity as an excellent alternative to traditional bank loans. In India, factoring finance, is the finest working capital solution for businesses of size. From loss making, and financially weak to new-age startup, Factoring is available with no unnecessary or additional interest charges. However, to make the most of factoring and ensure a smooth process, it’s essential to learn everything about factoring finance fee. In this blog, we will explore more about factoring finance in India and types of factoring fee.
What is Factoring Finance?
Factoring focused on one of the most important to run a successful yet often forgotten aspects i.e. Working Capital. It is an excellent working capital solution for businesses seeking to enhance their cash flow and secure immediate funds. By selling their accounts receivable or unpaid invoices to a factoring company, businesses can bypass the waiting period(usually 30-60 days) for customer payments and obtain a substantial portion of the invoice value upto 90%.
This accelerate access to funds and enables businesses to meet their immediate financial obligations, seize growth opportunities, and maintain a steady cash flow for day-to-day operations. With its ability to provide quick and reliable liquidity, factoring proves to be a valuable solution for businesses looking to optimize their working capital management.
When it comes to business funding, one of the most crucial questions that arise is about fees and interest rates. Understanding whether the pricing is fair and provides adequate value is of utmost importance. In this article, we will provide you with the a comprehensive understanding of factoring finance rates by shedding light on how this rate us calculated. So, as the business you can equip with the necessary knowledge to make informed decisions for your business’s financial well-being.
Factoring Finance Fee
In a factoring arrangement, a factor extends advances up to 90% to the client. On due date, the factor collects payment from the customers and pays the remaining amount to the client after adjusting the fees. In this complete process there are a few types of costs involved:
Factoring companies charge a factoring setup fee. It usually ranges between 1% – 2.5% of the limit approved to the business. For instance, a factor assigns a limit of 80 lakhs rupees (depending on various factors described later in the article) to a company with the invoices worth of 1 cr. Then the decided factoring setup fee would be charged on the assigned limit which is 80 lakhs.
The Transaction Fee is usually between 0.25% – 1% of the invoice amount. For instance, the same company, which has a limit of 80 lakhs brings in an invoice of 1 lakh from one of their customers. The Factor will give 90% of the invoice value, which is 90,000, to the company. On the due date, the factor collects payment from the customers and pays the remaining amount to the company after adjusting the transaction fees plus discounting fee on the invoice.
Discounting fee can range between 1%-2% per month. It is decided by examining various factors(mentioned below in the article). Some factoring companies deduct discount fee on the invoice + transaction fee in advance.
Overdue interest is charged in case of delay in receiving payments from the buyer. The factoring company usually charges between 1-2% on a daily or monthly basis depending on the terms.
Factors that influence Factoring fees
- Credit Profile of the Buyer: Credit profile of the buyer is the biggest aspects that factoring companies in India use to determine the limit and the fee. It’s because the final payment will be made by the buyer. A factor sometimes charges higher prices for buyers that are particularly risky. The better the buyer, the better the prices and terms a business gets.
- Financials: Factoring companies also ask for financial statements which include income statement, balance sheets and other financials for the examination and assess the health of the business, growth trajectory etc. An over leveraged balance sheet or diminishing profitability is a risky transaction which usually results in higher pricing.
- Industry: Some industries are riskier than others, which can result in higher rates. But companies from less risky industries get lower or better rates.
Conclusion
That’s the approach Factoring Finance or bill discounting companies in India use. Factoring in finance is a great solution for small businesses and startups that are looking to stabilize their finances in this uncertain market. Using Factoring ensures healthy cash-flow and money for working capital to run the business efficiently.
We are 121 Finance, India’s first RBI certified NBFC-Factor post 2022 revised regulations. With a mission to bring Factoring Finance to the MSMEs, startups and to support small ticket size trade to grow, we offer customized finance solutions that aren’t traditionally available to small businesses. Connect with our expert today and learn more about our services.
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