Two types of costs concerned in factoring are as:
1) The service fee or factoring commission
2) The interest on advances granted through the factor to the firm.
Factoring commission is paid to cover credit maintenance, evaluation and collection of sales ledger and other services and covering bad debt losses. The factoring commission will dependable upon the net volume of receivables, the size of particular receivables and quality of receivables. And the commission for non-recourse factoring is superior to recourse factoring as the former factor supposes full credit risk.
In India the cost of factoring varies by 2.5 to 4 percent where as in developed countries it ranges from 1 to 3 percent.
The interest on advances is typically higher than the prime lending rates of the bank or the bank overdraft rate. Inside the United States of America, factors charge a premium of 2 to 5 percent over and above the prime interest rate.
The high cost of factoring is partly offset through the benefits of factoring some of that are as follows:
- factoring give specialised service in credit management, thus freeing resources in the form of management's attention and time that they can focus on core issues of marketing and manufacturing and
- Factoring assists the firm to save cost of credit administration due to the scale of economies and also specialisation.