Since the last newsletter I sent out listing all and discussing some of the fees factors charge, I have been thinking that there really is no limit to the creativity applied to come up with esoteric and strange fees. The fact is that all these fees increase the costs of factoring and, to some extent, while justified are bound to confuse and perhaps irritate potential clients.

Let us, however, plod our way through the list so that all are informed and better understand the world of factoring.

The Minimum Fee This fee simply stated, says that the client will pay a minimum amount of factoring fees to the factor over the period of a month, or a year. So, irrespective of the fact that client revenue might drop for a variety of reasons, the factor would be entitled to take the minimum fee described in the contract. Factors implement this fee for a few reasons: Firstly, based on the client asserting a level of volume, which will be factored over a period of time, the factor is able to “pitch” a fee structure that reflects that volume. So, if the client maintains that volume of invoices factored, the minimum fee will never apply. But say the client asserts a volume to be factored of say, $1mn and only factors half of that? Clearly, one could assume that there had been misrepresentation of the volume in order to enjoy a fee lower than it would otherwise be. The minimum fee, therefore, injects a degree of reality into the negotiation. In addition, the factor is setting aside a certain amount of funds to cater for this volume and if it is not used, then the factor suffers a loss of revenue. In addition, the factor itself may have to pay a fee to its lenders for making this amount available, even though it is not used. Lastly, these minimums might be calculated and enforced monthly, quarterly or even yearly. For a client whose volume is not even throughout the year, an annual minimum would be more effective so that low-volume months are not penalized when total volume annually would more than meet the minimum.
Having said all this, I believe that the minimum fee is probably the hardest to sell to a potential client – no-one likes to guarantee a minimum when life is so filled with uncertainty. Why should the factor be protected against uncertainty?

Early Termination Fee This fee is levied on the basis of a stated formula should the client elect to terminate the factoring contract before its natural expiration date. There are many reasons that a client might decide to terminate the relationship early; sale of the company, a sudden infusion of cash from other sources or for specious reasons of which there are many. Also, should the client perpetrate a fraud on the factor, the factor will immediately terminate the contract and asses this fee on the unexpired portion of time the contract would have to its proper termination date. In essence the factor is trying to build a portfolio of clients, spends some time and effort on nurturing and maintaining a relationship, so to have it terminate prematurely both brings about an unexpected drop in revenue and makes it difficult to plan for staff levels and so on. The best thing to do is for a client to live up to its contractual responsibilities – it is, after all, the basis of an ordered society to undertake that which you promise to do!

Same Day Funding Fee While there are some factoring companies who receive invoices and are able to verify and fund on the same day, for others this is not possible. Borrowing arrangements the factor has with its lenders might simply prevent this type of turnaround. Under the circumstances, these factors will perform their due diligence on day 1 and advance funds to clients on day 2. It is in this instance that a factor might charge a Same Day Funding Fee. The ability to do so carries with it additional planning and routines on the part of the factor that are out of the norm. This is where this fee kicks in. While with most fees that factors charge it is apparent that most of them are not frivolous, some of these fees really do have the propensity to create ill-will on the part of clients and this might just be one of them! The fact is that waiting 24 hours for funds to arrive should not place a client in a difficult position, unless there is a call for emergency funds. Otherwise, bad management and planning can conspire to place a client in this position and the cost of bad planning is just that – an additional cost.

Funds Transfer Fee: Factors will charge wire transfer fees to cover their costs. They may also charge fees for ACH’s (an overnight transfer through the Automated Clearing House). This is a pretty standard fee and should not raise any eyebrows. Sometimes the amount of the fee is negotiable, so this is definitely something that a prospective client should consider. For that matter, the fee the bank charges for receiving a wire is also a cost of business that might be negotiated with your friendly banker.

Monthly Tax Lien Search Fee: It is vital to understand that a factor cannot purchase any invoices over which the IRS has placed a lien. Doing so is the equivalent of buying a car and paying for it without the owner’s consent! So, it is essential that the factor keeps a regular watch on the situation such that should the IRS file such a lien (and the IRS Lien will always take precedence over any lien filed before by the factor), that the factor becomes immediately aware of this fact. We cannot rely on our clients to inform us of this event. Needless to say, the filing of such a lien will have catastrophic consequences for the client and so towards this goal, the client will be asked to sign an authorization to the IRS to include the factor in any correspondence between it and the taxpayer.

Credit Reporting Fees: Evaluating the credit-worthiness of debtors is fundamental to the factoring industry and very few companies levy a fee for obtaining credit reports.

Invoice Handling Fee: Many factors require clients to provide them with invoice information electronically so as to avoid the need to enter invoices manually into the data base system. This fee is charged should a client not provide this information electronically.

There are many more aspects of the Factoring Agreement that are worthy of attention: Contract length, Set up and Due Diligence requirements, Collateral, Recourse or Non-Recourse and Personal Guarantees, to name but a few. Nonetheless, as none of my good readers are registered for any kind of Degree course in Factoring, I am going to end here (at the risk of disappointing some!) and will graciously allow the other topics to remain in storage for another time.

In the meantime, remember that if your anniversary is coming up, to continue in a state of married bliss for another year does not require you to renew your contract. Just like factoring, after all!



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