What invoice factoring costs can I expect?

It’s important to understand that factoring providers rarely ever charge one flat rate for their services. Rather, invoice factoring consists of different variables including invoice volume, creditworthiness, industry type and business stability. If your business is perceived as ‘low risk’ in the eyes of the factoring lender, and you have a large number of invoices that need to be factored, you can benefit from more competitive rates.

A higher volume of invoices suggests a constant stream of invoice payments to the factoring provider, making the arrangement far more cost-effective. The size of the invoice is also important, as larger single invoices incur less processing fees than multiple small invoices.

Credit checks are used by invoice factoring providers during the application process to determine your creditworthiness. If your business has a good credit score, chances are you’ll be able to benefit from lower rates.

Rates can also be industry dependent. Certain business sectors are perceived as lower risk from the onset because their payment terms are usually simple and straightforward. High risk industries are often labour intensive where the variables are more tumultuous and invoice payment dates less clear. The main invoice factoring costs are:

• Transaction fees: These include fees charged to process the payments made between your business, your customers and the invoice factoring provider. Charges apply for credit and debit cards, BACS payments and wire transfers.
• Set-up fees: These vary lender to lender but cover the cost to set up your business with your chosen invoice factoring provider.
• Overdue fees: When invoices expire and still need to be paid, charges for each day payment is overdue can apply until the money is repaid in full.
• Administration costs: The invoice factoring provider will conduct a variety of services including audit charges for business documents and application fees to process final statements.
• Early termination fee: There is usually a 28-day notice period for invoice factoring. If your business chooses to terminate its contract with the factoring provider early, you may be charged an early termination fee.
• Annual fees: For invoice factoring contracts that start from 12 months, an annual fee will cover the cost of keeping the facility open for one year.

Is invoice factoring a good idea?

Invoice factoring is an essential solution for businesses suffering from lengthy periods of unpaid invoices. Having a huge impact on cash flow, invoice finance provides funds to cover the short term, enabling business activities to continue as normal. If you have an extensive list of customers to pay invoices, this may be worth considering. With that being said there are both pros and cons to this product that should be understood before making any decisions.

One benefit is that factoring companies typically offer businesses bad debt protection for a small extra cost, which is an additional service definitely worth considering. Usually, these rates range between 0.5 - 2% of your business’ annual turnover. Bad debt protection is a form of non-recourse factoring where the factoring provider can take on the credit risk of your clients’ unpaid invoices, protecting up to 95% of your debtor balance.

You should also be aware of the fact that invoice finance is currently unregulated in the UK, which means that you are not protected in the same way you are with consumer finance products. However, the Asset Based Finance Association is the leading trade body for factoring companies. ABFA’s members follow a strict code of conduct to ensure responsible lending, and consumers have access to their independent Ombudsman for any issues.