“Show Me the Money”: How Do Your Factoring Partners Pay Commissions?

Factoring Broker CommissionsYou’ve begun working with a factoring company that handles your leads well. They keep you updated, follow up on a regular basis, and they have successfully closed a deal. Now, you say, it’s time to show me the money…but just how much money will you get?

We are not lawyers, and we don’t play them on TV, but we can’t stress enough the importance of thoroughly reading your broker agreement. The agreement should clearly define every question you might have about if, when, and how you are to be paid for your referred leads. Below are just some of the commission questions that you should have answered before you send any leads.

Do you get paid for your leads?

What are the circumstances under which you get paid? More importantly, are there special circumstances in which you will not get paid? Some broker agreements may state that leads that do not close within a certain period of time are non-commissionable. What if a lead becomes non-responsive and later reaches out directly to the factor? Other circumstances in which the factoring company may not pay you include invoices that are charged back or accounts that go into “default” status.

One interesting situation is referrals from your lead to the factor. If a lead you refer in turn tells others about the factoring company and brings them new business, are you entitled to a percentage of their fees as well?

Understanding the influence of these circumstances on your earning potential will not only improve your relationship with the factoring company but will also give you red flags to look for when pre-qualifying a lead for referral.

When do you get paid?

Factors traditionally pay out commissions one or two times per month, based on the collections during that time period. Make sure you know when to expect your commission to arrive so you can plan your own spending accordingly. If the time frame presented will not work with your business model, suggest an alternative to the factoring company.

How do you get paid?

Commissions may come via check or bank transfer. Which method does the factoring company use as their default, and do they charge you for using a different method? A same-day wire transfer may be the most convenient option for receiving funds, but if there is a significant fee attached to the transfer then requesting a less-expensive ACH or paper check could be better for your own cash flow.

Also, every commission payment should include a report detailing the basis for the amount you received – at the very least, how much the factor collected from your lead(s) and the fees they assessed that impact your commission amount. This helps you keep your records up to date and to address any inconsistencies between the report and the money you actually receive.

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How much do you get paid?

A factoring company may offer you 12 percent commission on collected fees. That sounds like a great quote on the surface, but is it really “fair”? Depending on the provisions of your broker agreement, you may end up with far less money than you anticipate at the end of the month.

First, you must determine whether the factor is paying you from the gross fee collected or if they are deducting their cost of capital beforehand. If cost of capital is deducted, your commission will be less than you expect and you will have little idea exactly what to expect.

How are “fees” defined?

Going off of the last point, what fees does the factoring company consider commissionable? Some factors pay based on the invoice fee while others include fuel advance, administrative or other monitoring fees. The inclusion or exclusion of these additional fees could have a significant impact on your earnings.

How long will you receive payment?

Finally, what does your agreement say about how long you will receive commissions? Commissions may be paid “for the life of the deal”, or they may end after the initial contract period. Also, if a lead becomes inactive for a period of time and then resumes factoring, the factor may consider it a “new” contract for which you would not be paid.

We are not claiming that any particular commission structure is right or wrong – you have to look for the terms that work best for your business. That said, as with any other element of the broker-factor relationship there must be a meeting of the minds about what is commissionable and how those commissions will be handled. Once again, read your broker agreement. Raise questions about any provisions that are unclear or seem to unfairly impact you, and resolve those issues before you begin working with a factoring company.

About the Author: Factor Finders specializes in finding factoring companies that can fund difficult-to-place deals. Our services help other factoring brokers capitalize on commissions that might otherwise be lost.

If you have a prospective transaction that you cannot find a funder then contact us at FactorFinders.com. We’ll find the factor for you and split commissions 50-50.

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