How much does invoice finance actually cost?

If you are intrigued by the concept of invoice finance but uncertain about the associated costs, it can be beneficial to understand the various components of a factoring or discounting quotation. Seeking professional advice or hiring a broker to identify deals tailored to your business can also be a wise move.

The terminology used in quotations can be intricate and may differ among lenders. Here are some key considerations when assessing each factoring or discounting quote.


The main influences on accounts receivable factoring rates

The primary focus for any lender is assessing their exposure to risk, and this consideration takes precedence. Invoice finance, in comparison to other lending forms, is relatively low risk as it relies on work that has already been completed.

However, where does risk potentially come into play from the lender’s perspective, impacting the associated cost?

  • The industry in which you operate, with some deemed riskier based on the timescale of payment receipts
  • The creditworthiness of both your customer base and your own business
  • In the case of preferring invoice discounting over factoring, the efficiency of your credit control procedures is considered
  • Your track record in collecting debt, taking into account any instances of bad or doubtful debts
  • Despite these factors, the total cost of invoice finance may be lower than anticipated, and in many instances, covered by administrative cost savings over the agreement’s duration.


How much does factoring and invoice discounting cost?

After approaching multiple lenders and receiving various quotes for invoice finance, what elements might be encompassed within your quotations?

I. Service charge

Usually a fixed monthly fee or a percentage of your annual turnover.

II. Discount charge

Analogous to the interest on a bank loan; for smaller companies, the discount charge may be included in the quoted service charge.

III. Additional charges

May involve fees for money transfers and will differ among lenders.

(VAT will also be added to the above charges)

When comparing quotes from various lenders, it’s crucial to consider the total cost over the proposed agreement period. A reliable result is obtained by evaluating the overall service or discount charges on a like-for-like basis.


Other details that might be included within invoice factoring quotes

I. How much finance will you receive for each invoice?

The quotation should include a percentage figure indicating how much finance will be released with each invoice. The calculations depend on various factors when determining the amount to be advanced, and seeking additional clarification can help ensure you’re securing a favourable deal.

II. Is any form of security being requested by the lender?

If this is the case, it’s advisable to seek professional advice before proceeding. Even if the deal seems to be the most favourable, if it relies on providing collateral, there is an inherent risk for you.

III. How will each lender chase customer payments?

If the factoring agreement they propose is ‘with recourse,’ you retain responsibility for any payments they cannot collect. It’s crucial to scrutinise the details, not just the overall cost, as exiting an invoice finance agreement is not always straightforward once signed.

IV. How client-friendly are the lender’s systems and processes?

Do you have a dedicated single point of contact on a dedicated phone line, or will you have to navigate a frustrating phone system each time you have a query? Additionally, assess their reputation for client service and response times, as these details can significantly impact your overall experience.

If you find it challenging to comprehend any aspect of your factoring quotes, consider seeking advice from a broker or another finance professional. Fees can vary significantly between invoice factoring and discounting. The latter, leaving you in control of your sales ledger, is often the more economical choice, but it’s crucial to understand the implications of each alternative.

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What are common terms and conditions of invoice finance?

I. With or without recourse

As previously mentioned, you might be presented with an agreement ‘with recourse,’ wherein you would be required to repay any advanced money if your customer fails to pay. On the other hand, factoring or discounting ‘without recourse’ alleviates this responsibility but typically comes with higher fees due to the heightened risk for your lender.

II. Confidential or disclosed

Confidential invoice discounting is often chosen by many to preserve existing strong customer relationships. This approach allows them to retain control of all communication regarding debt collection, as it is believed that customers may object to third-party involvement.

III. Single invoice factoring

For businesses involved in substantial or ongoing contracts, single invoice finance ensures a substantial cash injection upon project completion. Also referred to as ‘spot factoring,’ this could prove beneficial, particularly in industries like construction.

The invoice finance market has experienced significant growth in recent years, leading to increased competition. Vanguard Insolvency can offer guidance on its suitability for your business type, demystifying the jargon so you fully comprehend your agreement. With well-established connections with lenders across the UK, we can assist you in finding the optimal invoice finance solution.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.