How Much Does It Cost to Start a Factoring Business? (Sales Forecast and Breakeven Analysis Included)

The cost of starting a factoring business will to a large extent depend on how much the owner of the business wants to spend to start the business.

As a matter of fact, with a budget of $120,000 or even lower, you can start a standard small to medium-scale factoring business. The truth is that a factoring business is a straightforward business and doesn’t require heavy equipment and machines.

A factoring business is a business that buys the invoices or outstanding accounts receivable from a business, typically at a percentage of their total value, and then collects payments directly from the business’s customers.

With basic office equipment (furniture, telephone, printer, fax machine, and computer), and your working capital, you can successfully start a factoring business.

Estimated Cost Breakdown for Opening a Factoring Business

With a budget of $120,000 to start a factoring business, here’s a simplified breakdown of all startup expenses:

1. Business Formation (including licenses and permits): $2,000 to $5,000
2. Legal Consultation for Contracts and Agreements: $5,000 to $10,000
3. Accounting and Audit Setup: $2,000 to $5,000
4. Lease for 6 Months (optional depending on business model): $6,000 to $12,000
5. Utilities and Internet for 6 Months: $1,200 to $2,400
6. Factoring and Accounting Software: $5,000 to $10,000 (initial purchase or first-year subscription)
7. IT Setup (computers, printers, and networking): $5,000 to $10,000
8. Website Development and Hosting: $2,000 to $5,000
9. Marketing Materials (digital and print): $1,000 to $3,000
10. Initial Advertising Campaign: $2,000 to $5,000
11. Salaries for the First 3 Months: $10,000 to $20,000
12. Purchase of Receivables: $70,000 to $80,000
13. Emergency Fund and Unexpected Costs: $5,000 to $10,000

3-Year Sales Forecast and Breakeven Point

Factoring Fee Rate: Assuming your factoring business charges an average factoring fee of 5% on the invoices it purchases and starts with purchasing $70,000 worth of invoices per month in Year 1, with a 20% increase in purchase volume each subsequent year due to growth and expansion.

Year 1 

• Monthly Invoice Purchases: $70,000
• Annual Factored Invoices: $70,000 x 12 = $840,000
• Annual Factoring Revenue (5% Fee): $840,000 x 5% = $42,000
• Annual Operational Costs: $50,000

Year 2

• Growth in Invoice Purchases: 20%
• New Monthly Invoice Purchases: $70,000 x 1.20 = $84,000
• Annual Factored Invoices: $84,000 x 12 = $1,008,000
• Annual Factoring Revenue (5% Fee): $1,008,000 x 5% = $50,400
• Annual Operational Costs: $50,000 x 1.10 = $55,000

Year 3

• Growth in Invoice Purchases: 20%
• New Monthly Invoice Purchases: $84,000 x 1.20 = $100,800
• Annual Factored Invoices: $100,800 x 12 = $1,209,600
• Annual Factoring Revenue (5% Fee): $1,209,600 x 5% = $60,480
• Annual Operational Costs: $55,000 x 1.10 = $60,500

Breakeven Analysis

The breakeven point is when the total revenues equal the total costs. We will calculate the cumulative net income over the three years and determine the breakeven year.

Yearly Sales Forecast and Net Income

• Year 1:
  • Factoring Revenue: $42,000
  • Operational Costs: $50,000
  • Net Income: -$8,000
• Year 2:
  • Factoring Revenue: $50,400
  • Operational Costs: $55,000
  • Net Income: -$4,600
• Year 3:
  • Factoring Revenue: $60,480
  • Operational Costs: $60,500
  • Net Income: -$20

Cumulative Net Income Over 3 Years

• Total: -$12,620

Breakeven Analysis

This analysis shows that your factoring business does not reach its breakeven point within the first three years, with a cumulative net income of -$12,620. This means that by the end of Year 3, the business is still short of covering its initial and operational costs by $12,620.

The breakeven point, where total revenues would equal total costs, was not achieved within the timeframe of this forecast.

Strategies for reaching breakeven sooner could include increasing the volume of invoices factored, improving the efficiency of operations to reduce costs, or adjusting the factoring fee rate where market conditions allow.

Factors That Influence the Cost of Opening a Factoring Business

1. The Location of the Factoring Business

You will agree that when it comes to starting any business, your choice of location will to a large extent affect the overall cost of starting the business.

For example, if you choose to start a factoring company in a high-cost urban area, you will need to budget more money for rent or lease when compared to renting or leasing an office facility in a smaller town or suburban setting.

2. Licensing and Legal Requirements

The fact that factoring companies are required by law to comply with state and federal regulations means that before you start a factoring business, you must have a budget for licensing and legal requirements.

For a factoring business, you should budget for Business License, Registered Agent Service, Operating License (for financial services), State-specific lending or finance licenses,

Federal Employer Identification Number (FEIN), Anti-Money Laundering (AML) Compliance Program, Surety Bond (depending on state requirements), and Compliance with Fair Debt Collection Practices Act (FDCPA) regulations.

Note that all the costs associated with obtaining the necessary licenses, permits, and meeting legal requirements can vary by state hence you must check up with your state department to know how much licensing and legal requirements will cost you.

3. Staffing Cost

The number of employees you plan to hire will impact your startup costs. When we talk of staffing costs, we are talking of costs that cover all the expenses associated with employing and compensating personnel within an organization.

Your staffing costs encompass the salaries, wages, benefits, and related expenses tied to your workforce. For a factoring business, you should plan to recruit sales agents, support staff, and administrative personnel.

4. The Cost of Technology and Software

If you are planning to start a factoring business, you will need factoring business management software, customer relationship management (CRM) systems, and other technology tools to manage your operations effectively. The amount you will spend on this technology and software is going to form a significant portion of your budget.

5. Insurance Policies

If you are looking to start a factoring company, you should at least budget for insurance policy covers such as Professional Liability Insurance, General Liability Insurance,

Cyber Liability Insurance, Directors and Officers (D&O) Insurance, Crime Insurance, Commercial Property Insurance, Workers’ Compensation Insurance, and Business Interruption Insurance.

Note that the cost of purchasing these insurance policy covers, and the premiums you are expected to pay will be dependent on the risks your business is exposed to, and the rate of the insurance company you settle for.

6. Your Budget for Marketing and Advertising

If you are planning to start a factoring business, then you must create a robust budget for marketing and advertising that covers your website development, digital marketing, traditional advertising, and promotional materials.

Although there may not be any specific cost attached to marketing and advertising a business, the bottom line is that if you want to launch a factoring business that will continue to attract customers in and around your location, then you must be prepared to invest a significant amount to promote your factoring business.

7. The Cost of Office Equipment and Supplies

Before you can start a factoring business, you should create a budget for the following office equipment; computers and monitors, printers and scanners, fax machine or online fax service, photocopier, phone system,

Internet connection, and Wi-Fi router, office furniture (desks, chairs, cabinets, shelves), file cabinets or document management system, conference room furniture (table, chairs), reception area furniture (desk, chairs),

Office phones and headsets, postal and shipping equipment (postage meter, mailing supplies), multifunctional device (printer, scanner, copier), VoIP phone system (if using digital phone services), etc.

8. Your Operational Expenses

Your operational expenses, which can also be referred to as “operating expenses” or “opex,” are the ongoing costs associated with running and maintaining the day-to-day operations of your factoring business.

These expenses are essential to keep the agency functional and serve its clients. If you are planning to start a factoring business, then you must be prepared to create a budget for ongoing operational costs, such as:

Working capital, rent, utilities, insurance, staff salaries, bank charges and transaction fees, legal and compliance expenses, office equipment maintenance, professional fees, and more, once your agency is up and running.

9. Contingency Funds

Contingency funds for a factoring business are financial reserves set aside for unforeseen or unexpected expenses and emergencies.

These funds act as a safety net, providing the agency with a buffer to address unexpected financial challenges that may arise in the course of its operations.

Your contingency funds are important to your business because they will help you maintain your agency’s financial stability and ensure that it can continue to serve its clients and operate effectively, even in challenging circumstances.