How Much Does Invoice Finance Cost?

In the wake of the financial crisis, the big banks took a step back from financing SMEs and as a result, new lending fell 23% between 2009 and 2012. It wasn’t until the final quarter of 2015 that new lending to SMEs finally recovered and returned to positive annual growth, according to government figures. As a result of this lending drought, the UK became one of the leading countries for alternative finance, such as invoice finance (factoring and invoice discounting). Data from the EU Federation for the Factoring and Commercial Finance supports this, showing that factoring and commercial finance volumes grew in the EU by 6.2% to €1.5 Trillion in 2016; that’s £1.37 Trillion.

Almost ten years after the financial crisis, invoice finance providers have established themselves as a major part of the small business lending space as more business owners than ever release the value tied up in outstanding invoices for a quick cash flow fix or to make investments for future growth.

Factoring and Invoice Discounting Explained

Broadly speaking, there are two types of f invoice finance, factoring and invoice discounting. Factoring is suited to smaller, higher risk ventures and is provided by the big banks as well as independent financial providers. Factoring enables businesses to access the value locked in outstanding customer invoices before they are paid. The factor provides the business with an advance of around 90%, sometimes up to 100% of the value of the invoice and when the invoice is settled by the customer, the business receives the balance, minus agreed fees. In addition to providing funding, the factor also manages credit control, chasing and collecting unpaid invoices to save the business time and money. As a result, customers will be aware that the business is using factoring as a short-term funding solution.

Invoice discounting is similar to factoring, but it’s typically only available to businesses with a proven track record and an annual turnover of at least £500,000. Here, business owners have more control and can choose to raise finance against a single invoice or the entire debtor book. The main difference compared with factoring is that business manages its own collection processes. Therefore, customers are unaware that an invoice discounting facility is in place.

How Much Does Invoice Finance Cost?

The costs vary depending on the financial provider and are often negotiable. It’s a good idea to consider several suppliers and compare monthly discount charges (interest), which can range from 1.5% to 3% over the BoE base rate. There are also service fees, where the amount will depend on turnover, the number of invoices and customers. They 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.

If you would like to discuss the benefits and costs of factoring or invoice discounting, please call 08000 24 24 51 or email info@businessexpert.co.uk for free and confidential advice from one of our professional advisers.