Costs vary widely within the invoice finance sector, but we’ve tried to give a broad strokes explanation of where you’re likely to be charged and within what range.
Of course the better your business is performing, the better rates you’re going to be offered. Like all those who lend money, invoice finance providers are balancing risk vs. reward in the rates they offer.
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Invoice Finance Fees and Costs
Typical factoring costs vary depending on the financial provider and are often negotiable. It’s a good idea to consider several suppliers before making your decision. They key charges to look out for are:
Invoice Discounting Charges – This is basically interest and can range from 1.5% to 5% over the Bank of England base rate.
Service fees – These are management and admin costs and will vary based on your company turnover, the number of invoices and customers. Service Fees can range from 0.75% to 2.5% of turnover. In non-recourse agreements, credit protection charges are levied, ranging from 0.5% to 2% of turnover. Invoice discounting fees are typically lower than factoring as credit control remains in-house. Fees can range from 0.2% to 0.5% of turnover.
Cost of Factoring Explained, With Example
Let’s imagine an example where a small business wants to factor an invoice of £40,000. The rates offered are a discounting fee of 3% and a service fee of 1%. The terms offer your business 80% of the invoice immediately, with the remaining balance when your client pays.
This means you’ll receive £32,000 within a few days.
The service fee is easily worked out at 1% of £40,000 so £400.
The invoice discount rate of 3% is always an annual fee. Assuming your client pays the invoice within a standard 30 days, we will calculate our discount rates of 3% divided by 365 days in the year to give us the daily interest rate of = 0.008%
Since the client is paying after 30 days we can multiple out daily rate of 0.008% x 30 day to give us = 0.24%.
= 0.24% of our 80% advance of £32,000 is £76.80.
Our total is therefore £476.80 on this single invoice.