Understand the Power of Factoring Broker Commissions
So you’re exploring a career as a freelance factoring broker / consultant and you now want to learn more about commissions and income earnings potential. Well, here it is..the good part….the MONEY! All about Factoring Broker Commissions.
Freelance brokering in small business commercial finance can be a very, very lucrative occupation and the commissions and referral fees paid to referrers by banks and factors can be gauged simply as extraordinary. And, though there are many types of commissions depending on the financial products and services you provide, here we will focus strictly on those associated with accounts receivable factoring.
Factoring Broker Commissions: Unique in the Industry
Commissions paid to independent factoring brokers tend to be relatively unique in the commercial finance industry. This is because they are:
- RESIDUAL COMMISSIONS: This means they are paid on a continuing and recurring basis each month based on the factor’s earned fees related to payments by account debtors upon financed invoices
- LIFE-OF-ACCOUNT COMMISSIONS: This means you will receive such monthly residual commission payments for as long as your referred client continues to use the factor’s services
This commission style is also common for purchase order finance referrals but most other industry product areas pay a one-time fee in “points” (a percentage of the loan amount) much like a typical real estate loan.
Referral commission fees paid to freelance factoring brokers / consultants on factoring transactions are most often somewhere between 10%-15% of the fees earned by the factor. This range depends on the:
- factor’s commission policy
- amount of invoices purchased each month (client size)
- the factoring arrangement’s fee structure
- amount of continuous business you, as an independent broker, send to a particular factor
Factors will also run periodic bonus programs and/or sales contests where commissions can occasionally be as high as 20% of the factoring fees earned. This is one reason why it is important to sign up for newsletters at as many factors as possible.
Broker commissions are paid monthly and you will usually receive a check during the first or second week of the calendar month for commissions / fees generated the previous month. When first submitting a deal for financing, it will often take two (2) months or more before you receive your first commission check. This is because your fees are based on the factoring fees which, in turn, are a function of collections. Factors must purchase and then be paid on invoices before service fees can be tallied and broker commissions paid.
Earning Additional Consultant’s Fees from the Client
In most cases, brokers will simply earn referral commissions paid by the lender when the deal is placed. As an active industry consultant, however, you may find situations where you will also earn a “placement fee” paid by the client. This “double payment” usually occurs in difficult deals when a consultant is uncertain as to what type of financing will be available to remedy a particular client’s problems or if financing will be available at all. When sourcing an asset-based loan for a client or similar non-factoring solution, most consultants will earn a contractual placement fee paid by the client prior to or at loan closing. On occasion, when such an agreement is in place and factoring turns out to be the only accessible or realistic solution to the problem, a broker may be the recipient of both a factoring commission paid by the factor and a placement fee paid by the client. Placement fees are typically based on performance and brokers should strictly avoid charging “up-front” placement fees when the likelihood of successful financing is remote.
Monthly Factoring Broker Commission Reports
Factors generate a commission report for each of their referring brokers having active clients. The commission report is based on the total collections received during the month for all of a broker’s referred clients. Most factors provide broker commissions monthly with the start date being the first of the month and the end date being the end of the month. The commission report itself is based on the sum of the various client collection reports generated during the period.
There are several standard formats used by factors for their brokers’ reports, but most will display both total purchases and total collections for the monthly period. The collections will show the factor’s fees earned and then multiply that amount by the broker commission rate. The purchases made during the month will provide the broker with a snapshot of what fees will be earned in the near future.
Estimating Your Income and Setting Some Goals
If you are a “goal setter” (and as a successful industry broker you should be) and are interested in knowing how much business you need to generate to earn “x” number of dollars per year, here is a simple example.
Let’s say you submit a mid-size service sector client such as a janitorial service to a factor for financing. And for sake of this example, let’s say the janitorial service factors $150,000 in invoices each month. The invoices are paid the the janitorial service’s customers on average in 30 days and the factor’s fee rate (discount rate) is 2.5% for 30 days.
Based on the fee rate, the factor’s total fees will be $3,750 per month (2.5% x $150,000). If the factor’s broker commission rate is 10% of fees earned, you will receive $375.00 per month or $4,500 per year for that single referral as the broker of record. If your goal is to earn $50,000 per year as a freelance broker, you will need about 11 similar accounts on the books to meet your goal. If your goal is to earn $100,000 per year, you will need to develop about 22 such accounts. Also note, a broker consistently submitting quality clients to a factor is likely o earn a higher rate than the industry standard 10%. Typically, you will find that a successful freelance broker will be earning a lucrative 6-figure income, when the sum of his client financings (invoices purchased monthly), range between $2.5 and $3 million.
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Want to find out more about commissions? You can learn more and ask questions of others by posting your question at the IACFB Factoring Group at LinkedIn.
