It is based on the level of risk and the volume of invoices. Invoice factoring costs are called the factor rate. The credit-worthiness of your customers, the length of time they take to pay, and your business’ credit history are key parameters in this calculation. Invoice financing companies will consider risk when calculating the interest rate and their management fee. There may also be other costs – such as an origination fee for processing the loan. Interest and fees are usually billed on a monthly cycle. Credit management fees typically vary from 0.25% to 0.5% of turnover. Typical interest rates range from 1.5% to 3% over Bank of England base rate and are calculated daily. Borrowers are charged interest and credit management fees.
Invoice financing costs are straightforward. This means factoring usually costs more than invoice financing. Because factoring agents take over the company’s sales ledger and assume responsibility for chasing customers for payment, their administration costs are higher than those for invoice financing. This is a hybrid calculation, and it works out as a percentage of every invoice and a ‘time-charge’ that reflects the length of time that credit is extended. Factoring agents charge something called the ‘factor rate’.
#Cost of invoice factoring plus#
Invoice financing companies charge interest on the loan, plus an administration fee. Invoice financing and invoice factoring have different cost structures. The lender recoups the loan of £8,000 and after deducing fees and interest, they send the balance to the wholesaler’s bank account.īalance transferred to wholesaler: £1,700 They remain unaware of the lender’s role. As this is confidential invoice-financing, the customer assumes they are making payment direct to the wholesaler. This is called the ‘pre-payment percentage’.Ħ0 days later, the customer pays £10,000 into a trust account controlled by the lender. The wholesaler submits a duplicate of the invoice to the lender and they send £8,000 (80%) to the wholesaler’s bank account. They will lend 80% of the value of the invoice as soon as it is raised. However, the wholesaler has an agreement with an invoice financing company. This locks up the value of the invoice for two months and slows down the wholesaler’s cashflow. They usually take 60 days to pay the bill. However, unlike those types of lending, with invoice financing, the borrower usually has no need to provide assets as collateral, nor are the owners or directors required to supply a personal guarantee.Ī wholesaler sends an invoice for £10,000 to a customer.
#Cost of invoice factoring series#
In simple terms, invoice financing functions in the same way as a revolving credit line or a series of short-term bank loans. Invoice financing can be used across your whole sales ledger, or you can choose the customers and the invoices you want to use for a loan (this is called selective receivables financing).
In most cases, the customer will never know you used the invoice as security for a loan. Once the loan is repaid, and the lender deducts interest and fees, the balance is transferred to your bank account. The customer assumes they are paying you, not the lender. You retain control of your sales ledger and are still responsible for chasing your customers for payment.Ĭustomers post their payments into a trust account controlled by the invoice financing company, but with the appearance of an account controlled by you. The sum received may vary from 75% to 95% of the invoice value. Payment is usually made within 48 hours of submitting your invoice. With invoice finance, you issue an invoice to a customer, then you receive a percentage of the invoice value as a loan from a lender (the invoice financing company).