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How Do Factoring Companies Make Money in 2023?

If you are considering starting a factoring company, then one of your major concerns should be how you are going to make money from the business. Interestingly, there are a couple of ways a factoring company can make money. We are going to look into some of those methods.

What is a Factoring Company?

A factoring company is a financial institution that provides short-term financing to businesses, and they do this by purchasing the accounts receivable of the business. This is how it works, if a company approaches a factoring company for their services, the factoring company gives the company an advance payment which is usually between 80 percent and 90 percent.

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The factoring company usually purchases the company’s invoices at a discount, and that is where they make their profits from. There is always a duration for the company to pay back, and the factoring company usually receives the remaining balance when the customer pays the invoice.

In as much as factoring companies are the go-to business when small and medium-scale businesses are struggling to keep their cash flow moving, it is important to have a full understanding of all the charges involved.

6 Ways Factoring Companies Make Money

1. By Charging Fees

Factoring companies make money by charging a fee, known as a factor fee, to businesses that sell their invoices to them.

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The factor fee is typically a percentage of the invoice amount, and it can range from 1 percent to 5 percent. The factor fee is how the factoring company makes a profit. Please note that in addition to the factor fee, factoring companies may also charge other fees, such as:

  • Administration Fees: Administrative fees are the fees factoring companies charge to cover the costs of processing invoices and managing the factoring account.
  • Interest Fees: Interest fees are the fees factoring companies charge their clients if the invoice is not paid by the customer within a certain timeframe.
  • Late Payment Fees: Some businesses will always make late payments hence factoring companies introduce what is known as late payment fees. The aim of introducing late payment fees is to stop people from making late payments.
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Apart from the basic means of generating income as listed above, a factoring company can also make money by offering the following services:

2. Bookkeeping and Accounting Services

Interestingly, most factoring companies usually have qualified accountants and bookkeepers under their payroll hence it is easier for them to offer booking and accounting services to small-scale businesses that don’t have the capacity to hire accountants.

When a small business hires a bookkeeping and accounting firm, they expect them to help them with preparing financial statements, such as balance sheets and income statements.

3. Payroll Services

Another related service that a factoring company can offer to make an additional income is to offer payroll services for small businesses. Payroll services involve calculating and issuing employee paychecks, as well as withholding taxes and submitting payroll reports to the government.

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4. Tax Preparation Services

Tax preparation services are yet another related service that a factoring company can offer in order to generate additional income for the business. Tax preparation services involve preparing tax returns for businesses and individuals. Tax preparers may also advise clients on tax planning and strategies.

5. Auditing Services

If a factoring company has qualified auditors, then the factoring company may offer auditing services to small businesses and individuals as a way of generating more revenue for the business.

The truth is that most small businesses don’t have the capacity to hire professional auditors to help them audit their books. But if they already have a relationship with a factoring company, they can negotiate with them to get a discount on their auditing services.

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Interestingly, aside from offering small businesses discounted auditing services, factoring companies usually advise them on how to keep their books so as to make it easier for them to plan based on the financial records.

6. Financial Consulting Services

A factoring company that wants to make extra income can also offer financial consulting services to individuals, and small and medium-scale business owners. There is no limit to the type of financial consulting services a factoring company can offer, as they can help business owners hone their investment skills, and manage their cash flow, their budget, and financial planning.

In conclusion,

Knowing how factoring companies make money does not guarantee that you can make money from a factoring company. You have to deploy all the needed marketing and sales strategies to be able to attract clients that will patronize you. Interestingly, there are several ways you can market your factoring company in your target market location.