What does invoice factoring cost?

27/01/2023

One of the most common questions we get asked is: “How much does invoice factoring cost?”

Unfortunately, there is no single answer to this question.

Whilst you can get a rough indication of potential costs from looking at a funder’s teaser rates, to get a more accurate quote requires more information.

Our factoring quote tool, for instance, will provide an instant indicative quote based on just a few bits of information about your business.

However, with one factoring company’s fee structure typically different to another’s, the answer to the question will depend on the funder you choose, the terms of your agreement, your business and its clients.

We’ve therefore created this guide to help give you a better understanding of the fees and terminology behind a factoring facility. Or get an instant indication of the amount of funding you could release with factoring by using the calculator below:

Typical pricing structure

Most facilities are individually priced depending on your business and the facility you choose, but typically invoice factoring charges consist of two main fees:

Service charge

The service charge covers the ongoing cost of running the facility. In some cases this can include the cost of credit control and bad debt protection, but these are often separated out for additional clarity.

This charge is usually calculated as a percentage of turnover, but it can vary according to the value and volume of invoices you put through the facility.

Discount charge

The discount charge is based on how much money you take from the facility, or funds in use. Accrued daily but deducted at month end, it is usually a percentage above base rate but sometimes above LIBOR, and varies between funders. Some funders operate a minimum base rate, which is over and above base and LIBOR.

Some factoring facilities such as recruitment finance, where the factoring company additionally provides back office and administrative support, might use a composite fee structure. In this case the service and discount charges are effectively combined into a single facility fee, which is the ongoing cost of running the facility and calculated as a proportion of turnover.

Key factors for consideration

All factoring companies price their products in slightly different ways. But, typically, invoice finance costs are calculated based on the volume of invoices to be factored and the collectability of these invoices.

In order to quantify these values, the factoring company may consider:

• How much you will be factoring
• The size of each invoice
• The value of any outstanding invoices
• Your business niche and industry
• Your business reliability, longevity and turnover
• The characteristics of your clients
• Typical payment times

Whilst this offers a rough guide to what your factoring company may consider, it’s worth remembering that different lenders have varying appetites and will put different weight on each of these criteria.

For example, whilst one factoring company may not typically fund businesses in your sector, another may specialise in it.

Therefore, it is wise to find a funder who fully understands your business and its needs in order to access the best rates and service for your requirements.

Cost vs benefits

As with all things in business, it’s vital that you don’t just look at the cost of a factoring facility but also consider the value that it brings to your business.

Particularly when you compare two products and fee structures side by side, it’s important not only to focus on the charges as, often, the benefits of one may far outweigh the other.

Here are just five of the overall benefits factoring can bring to your business:

Improved cash flow

By advancing up to 90% of an invoice’s value within 24 hours, factoring provides fast access to working capital ahead of being paid by your customers. This money can then be used for a variety of purposes including to meet day-to-day commitments, take on new orders or invest in new machinery.

Flexibility

Factoring can be great for businesses in times of both growth and uncertainty because facilities grow in line with the business. Whilst traditionally many businesses turned to bank loans, these do not offer the same flexibility as invoice factoring and can therefore restrict growth.

Regain time and resource to focus on your core business

With the option to include a dedicated sales ledger management service, factoring can reduce in-house overheads and improve your credit control performance. This allows you to regain time and resource to focus on your core business rather than chasing payments.

Added security

Factoring companies can also credit check your potential customers. This information improves your chances of trading with those who are likely to pay on time. As well as this, credit protection can be incorporated into the facility to safeguard your business against bad debts.

Better position for growth

By gaining access to cash ahead of being paid by your customers you will be in a better position to capitalise on new opportunities as and when they arise, as you’ll have the necessary funds to fulfil the order without worrying about cash flow.

Comparing factoring quotes

We hope that this resource has helped to explain factoring fees in more detail.

We always recommend that you get quotes from multiple lenders in order to accurately assess which would be a better fit for your business.

However, given the complexities of invoice factoring fee structures and different lenders offering varying service levels, it can be challenging to accurately compare quotes from multiple lenders and find the best fit for your business.

That’s where we come in. As a specialist invoice finance broker, we will get to know your business and its requirements before introducing the lenders which we feel will be the best fit for your needs.

We’ll then be on hand to help you through the application process and explain any fees or jargon in more detail.

Ultimately our goal is to help you secure the funding that will support your business and allow you to reach your goals.

To see how we could help your business contact us on 0800 9774833 or request a call back and we’ll call you back at a convenient time.

Alternatively, for an instant indication of the type of factoring facility your business could access, get a quote here.