How Invoice Factoring Companies Make Money

How much do Invoice Factoring Companies Make?

In the last 6 months the question of how much we get paid for passing the business certainly seems to be raising its head. So we thought to write a Blog about how an introducer’s commission works once a deal has been placed. Here at Simply Factoring BrokersEarnings of Invoice Factoring Companies we like to be completely up front and honest and if this question does get asked we are always honest and tell the customer exactly what we get paid. Making this public and putting it on the World Wide Web will hopefully make dealing with invoice factoring companies a little more transparent.

If you have ever taken out a factoring facility then you will be familiar with how the costing’s work, but for those of you reading this that are unfamiliar let me explain how the pricing structure works. Basically Factoring is a product which releases a percentage of cash tied up in your unpaid invoices, so once you have raised an invoice you will get charged a service fee against the full outstanding balance of your invoice. Once you have then received your IP (Initial Payment) you will be charged a discount charge (which in all intensive purposes is an interest rate) for the outstanding balance paid to you until your invoice has been settled I.E. once your customer has paid the invoice.

As a broker we would make our commission against the service fee element of your agreement, however throughout the industry there isn’t a standard commission structure. There are different commission structures for different aspects of Invoice Finance, so for the purpose of this Factoring Blog let’s just focus on Factoring & Invoice Discounting for businesses that have a turnover of £300K plus. Before your commission structure is agreed it does depend on how much business you pass, are you dealing with any other funders and to an extent how good a negotiator you are?

Do Invoice Factoring Companies All Make the Same?

If you ever want to know what your intermediary makes in commission then it is certainly worth asking, because the new ABFA regulations state, that if asked the broker should say how much they are getting paid. However the below is a good example of what most people are on;

Tier 1 – If you pass a deal once in a blue moon:

If it’s not their main source of business then someone like the above would likely get a one off payment of around £750 – £1,000. Or some kind of reciprocal business agreement.

Tier 2 – If you pass 3+ deals a year:

If you pass a few deals a year you would likely be on some sort of ongoing commission, something like 20-25% of the ongoing service charges for the life of the client and maybe £1,000 bonus payment for every 3 deals placed (We would say this is the standard commission agreement)

Tier 3 – If you pass 12+ deals a year:

If you are a larger introducer of business and this is a main source of revenue for you then this is where it can differ slightly as a lot of “super brokers” commission agreements will differ slightly. But as a guideline you would make 20 – 25% upfront against the minimums, 20 – 25% against the ongoing service fee charges in a deal – maybe a percentage of doc fees or a volume bonus. So you can see that the more business you pass the money you get paid per deal.

However you should note that if you are dealing with a broker you shouldn’t have to pay a fee to them for placing the business, as a broker will make their money for putting you into an agreement you are happy with. The benefits of dealing with a broker is they will generally get you a better deal than if you went direct to the funders irrelevant of the commissions payable, because of the volume of business they pass. A good broker would generally give you 2 – 3 options for you to choose from and put you to the right home suited for you business.

We hope this Blog has helped you and made you more aware of what a broker would make out of placing a deal for you. If you have any questions or think we may be able to help you in any way please feel free to contact us.

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