Your broker commissions are both residual and for the life of the account and are a percentage of the fees earned by your factor. This unique and highly lucrative method of compensating individual consultants for their referrals is what draws many to this highly professional industry.
Factoring fees have come down markedly over the years due to both competition and advances in technology which reduce transactional risks. In fact, fee rates for factoring invoices for 30-35 days are now typically less than the discount your client would absorb if his customers paid by credit card.
Most factors will provide you a “commission report” which will document both the purchases and collections for the most recent 30 day period. The collections are used to determine your commission for the month. Purchases document the dollar amount of new invoices purchased for the month which will provide you with some insight as to the commission you will earn in the next 30 days or so.
When you begin to market the factoring product to small business owners, you will naturally be asked questions regarding how factoring works, how it will solve a particular problem, how fast can it be put in place, etc. One of the most common questions regarding factoring will naturally be: How much does it cost?
The methods by which fees are charged by a factor are set forth in their factoring contracts (often called Master Purchase and Sales Agreements) and although there are hundreds of derivations, fee structures generally fall into just one of two basic categories:
Fee structures using this method are very common among small and mid-size factors with the most common windows being 10 or 15 days. A sample of this fee structure can be seen below for a $100,000 invoice, advanced at an 80% rate, and a fee of 1% for each window (roughly two-percent per month). Window fees are usually charged on the face amount of the invoice, not the advance amount.
Using the previous “windows” table, you can calculate that an invoice of $100,000 outstanding for 40 days would be charged a factoring fee of $3,000 (31-45 day rate) or 3% of the invoice face value. Once the invoice is paid in full, the factor will repay itself the advanced amount of $80,000 leaving $20,000 additional funds due to the client as a rebate. Prior to wiring those funds to the client, however, the factor will reduce that amount by deducting the factoring fee earned amount of $3,000, thus leaving a net rebate of $17,000.
Fee structures using this method are very common among larger factors wanting to make their fees more resemble those of asset-based lending. Here, a fixed discount is charged on the invoice face amount for the factoring services of credit analysis, collections, and operations. An interest component is also charged on the cash amount advanced. This is added to the fixed discount for a total financing fee.
The interest component is usually pegged to the published prime rate, LIBOR (London Interbank Offered Rate) rate or the 10 year U.S. Treasury Rate which acts as a base rate of interest. A margin for profit is then added to the base rate of interest which represents the total interest component charged. An example can be seen below for a $100,000 invoice, advanced at 80%, with a flat factoring discount of 3% and 12% fixed simple interest rate for each 10 day period.
For their referrals, brokers of record receive a portion of the factoring fees earned by the factor. Throughout the industry, the standard rate is 10% of the factoring fees earned. There are, however, many factors that pay slightly higher rates and especially to those brokers that prove themselves not only professional but productive. For normal factoring arrangements that are not “niche” which require a specialized lender, it is usually beneficial to you, as a broker, to work closely with just one or two factors, sending them the bulk of your business. It is very common for a factors to raise your commission rate to 15% if you are productive. That represents a 50% increase in income for you, the broker. Additionally, if you are productive and sending a significant amount of business to a factors, do not be surprised if you are offered a BDO position in your area. The industry is full of career opportunities for those that prove productive in the important area of business development.