Is Invoice Finance Expensive?

When it comes to invoice finance, one of the most common questions that businesses ask is “how much does it cost?” The answer, as with most things in life, is there is no standard one size fits all answer. Costs can vary depending on a number of factors, including the value of the invoices being factored, the perception of risk, the length of the factoring period and the discount rate offered by the invoice financing company.

It’s also important to look at the levels of service you will receive as there should be more to this relationship than just the price, but in this post, we are going to take a look at the possible cost structure that businesses may see when entering into a factoring agreement.

What Are The Associated Fees?

There are a number of ways an invoice finance facility attracts fees. The most common encompasses a fee linked to the amount funded and works in the same way as interest charged on an overdraft i.e., it’s calculated on the outstanding daily balance and passed once a month. This fee is called a discount charge and is typically charged at a margin above base rate.

The second fee is typically called an admin or service fee and is expressed as a percentage of the value of each invoice, whether the money is taken or not. In addition, some companies may charge additional fees for extra work undertaken, but again these vary depending on the organisation you have entered into an invoice finance agreement with.

Some companies may also offer a flat fee structure which is a blending of the service fee and discount fee, though easy to understand and calculate, this is frequently more expensive than the more “traditional “two-fee structure.

What Factors Influence The Cost?

  • The creditworthiness of the business’s customers: If the factor perceives that the business’s customers are high-risk, they may charge a higher rate to offset this risk.
  • The amount of time until the invoice is due: The longer an invoice is outstanding, and you are borrowing against this, the higher your discount charge will be as the debt is being cleared over a longer time frame. Also, the longer an invoice is unpaid the greater the chance that it will not be paid so an element of increased risk pricing may result. As a result, businesses that factor invoices with longer payment terms and draw higher levels of cash will generally pay a higher discount rate than businesses that factor invoices with shorter payment terms.
  • The workload involved: If you have opted for outsourced credit control and you have a high volume of low-value invoices and customers, then you will pay more than a business that has relatively few customers with higher invoice values.
  • The length of contract: If you sign up for a longer contract you may be able to negotiate a fee reduction as the funder can plan its own cashflow and knows it will have you as a client for a clear period

An Invoice Finance Cost Example.

For the purpose of this simple example, we will assume that you are factoring an invoice of £10,000. Typically, a funder may be providing you with between 80% – 90% of the value of your invoice, so for this example, we will use the value of 80% which means that you could access £8,000 (less initial service fee) straight away before your invoice is paid.

Once your client has then paid the invoice, other costs will be deducted before you receive the final amount owed from your invoice. These further associated costs are generally the discount fee which will be charged on the sum advanced and how long it was outstanding.

So, for the purposes of this example let’s say your service fee was 1% and your discount fee was 3% above base (also 3% at the time of writing). Let’s also assume you took £5,000 of the available funds and the invoice was settled 30 days later, then your costs would look something like this:

Invoice £10,000.

Less service fee 1% £100.

Revised value £9,900 funded at 80% = £7,920 available to take.

£5,000 advanced (£2,920 still available if needed) and repaid in 30 days as the whole £10,000 is received.

£5000 X 6%/365 (to get daily rate) X30 days = £24.65

The total cost to factor a £10,000 invoice and utilise £5,000 of this, is the service fee plus the discount charge = £124.65. Therefore, you would have received back £9875.35 of the value of your £10,000 invoice.

There may be other charges that apply such as CHAPS fees or unpaid fees, renewal, or arrangement fees but again this is dependent on each invoice finance company. Ultimately, the cost of invoice finance will depend on a number of variables. However, by understanding the different charges involved and shopping around for the best service, prepayment, and fees, it is possible to find an invoice financing solution that suits both your needs and your budget.

What Are The Benefits of Invoice Financing?

Invoice financing can also offer a number of other benefits, including:

  • Improving business cash flow: By selling receivables to a factor, businesses can free up cash that would otherwise be tied up in outstanding invoices. This can help businesses to meet their short-term financial obligations and maintain a healthy cash flow.
  • Flexible financing: Invoice financing is a flexible form of financing and can be helpful for businesses that are growing or have sporadic or irregular cash flow needs.
  • Speed and simplicity: Invoice financing is a quick and easy way to get funding, as businesses can typically receive financing within 48 hours of submitting their invoices.
  • Improved supplier relations: Invoice financing can help businesses to improve their relations with suppliers, as it allows businesses to pay their invoices on time, even if they are waiting on payment from their customers.
  • Credit control: No more having to juggle ongoing sales whilst trying to get invoices paid, the factoring company can act as your outsourced credit control department, chasing for payment and issuing statements etc.

Finding an Accredited Lender.

When looking for an invoice finance company to work with, it can be important to consider if they are members of UK Finance. UK Finance is an authoritative, balanced, evidence-led industry body, representing members who provide finance, banking, markets, and payments-related services in or from the UK.

Once you’ve found a few potential lenders, it’s time to start comparing their services, rates, and fees. As we mentioned earlier, there is no standard pricing for invoice finance so rates and fees can vary significantly from one lender to the next. It’s important to get quotes from a few different lenders so that you can compare their rates and fees side by side and understand how they will work with you.

Once you’ve compared all the quotes and found the most competitive option, you’re ready to apply for invoice finance. Applying for invoice finance is a straightforward process and will usually involve a meeting with a member of the sales team to arrange a formal application which will include a credit check on your business, and a review of your business financials, activity, and processes.

They’ll also need to see a copy of your invoices and invoicing procedures, history of receipts and any disputes so that they can assess the risk involved in funding these invoices. Once they’ve approved your application and legal documentation has been completed your outstanding invoices can be uploaded and you’ll be able to access the funds almost immediately.

For more information on invoice finance, please contact us.