Costs of Invoice Factoring and Discounting

Invoice financing can be divided into factoring and discounting. Both factoring and discounting involves a provider paying you 80+% of the invoice’s worth up front and the rest when the client pays the entire balance. The main difference is that providers use their own methods of extracting cash from a company’s clients without that company’s approval in factoring. Discounting enables a business to collect the invoices themselves and may help maintain good relations with clients.

Suitability

Invoice financing is really only suitable for companies that have an annual turnover of at least £50,000 per annum. Exceptions to this rule are start-ups. Most other businesses will be rejected out of hand by providers. Generally, providers expect a company to have a decent spread of clients, not being overly reliant on one but at the same time, not having dozens or even hundreds of very small clients. It is also necessary for the debt to be contractual and simple so that it’s easy to prove with debt less than 90 days old ideally.

Interest Charged

Naturally, there are costs incurred by businesses that use invoice factoring and discounting providers. Your best bet is to analyse the fees charged by several different providers and compare them in terms of discount charges offered, management fees, added extras and cost to terminate the service. Expect a minimum of three month’s notice to be required if you wish to leave a provider. Some providers look for 12 months notice and this may simply be too expensive for your business.

What invoice financing providers call ‘discount charge’ is actually little different from loan interest charged by banks. The general interest range for invoice factoring is 1.5-3% of the invoice so don’t pay anything over the latter amount. Providers calculate the interest rate daily and you will pay the interest due every month. The charge for invoice discounting is lower because businesses are responsible for collecting their own debts. The overall lower level of service means invoice discounting fees could be as little as 0.2% of the total invoice. Don’t pay more than 0.5%.

Credit Protection

There are few additional charges if you choose the recourse finance option because this means you will suffer if a client refuses to pay the money owed. In such an event, you would be required to repay the money received from the provider. Non-recourse finance on the other hand sees the provider take full responsibility for the debt. In this instance, the provider loses out if the client reneges on a previous agreement to pay. This is why there is a minimum credit protection charge of 0.5%. The highest you can expect to pay is 2% of the invoice value.

In the worst case scenario, you will have to pay a maximum of 5% of the invoice value and in return, you receive at least 80% of the owed money immediately and total security if the client refuses to pay. You can assume this risk and pay just 0.2% of your total invoice. Whatever option you choose, it is clear that invoice factoring and discounting offer a way forward for businesses having problems with cash flow.

We can offer you financial solutions to help keep your cashflow healthy. Request a quote now to find out how much invoice finance can save you.


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