A guarantee fund is a reserve of money that the factoring company sets aside to shield it from any potential defaults on payment.
This fund is supplied by a fee the factor levies on the invoices it’s purchased at a rate of around 10%. This fee is given back to the client company if the factor manages to receive payment for the client company’s invoice.
A word of caution: certain factoring companies have additional fees, like processing fees, potential litigation fees, subscription fees, etc. Be sure to look over your factoring agreement with a fine-toothed comb to avoid nasty surprises down the line.
Let’s use an example to better understand how factoring fees are usually calculated.
In September 2022, Company A sold a €1,000 invoice to a factoring company. As we’ve seen before, there are a few fees that could apply in this instance.
A financing fee based off the Euribor rate (0.54% at the time of sale) with an additional 2% added by the factor, which comes to 2.54%.
1,000 - 2.54% = 974, i.e. €26 for the financing fee
A factoring fee, set at 1% by the factor.
1,000 - 1% = 990, i.e. €10 for the factoring fee
Contribution to the guarantee fund, set at 10%. 1,000 - 10% = 900, i.e. €100 will be held temporarily held for the guarantee fund, to be returned to Company A if the factor managed to retrieve payment for the invoice without incident.
Company A will have to pay a total of €136 on the €1,000 invoice they’ve given over to the factoring service. If the factor manages to get the invoice paid without any issues, the fee will be €36.