What are the Costs of Invoice Discounting?

What are the Costs of Invoice Discounting?Invoice discounting is an alternative solution to traditional business finance but what’s are its costs?  This type of business finance provides you with instant access to cash tied up in your outstanding invoices. An invoice discounting facility makes business much more flexible than an overdraft or business loan. 

In this article, we’re going to take a quick look at what is invoice discounting and the costs that are associated with it, we will weigh them up against the benefits. How much does invoice discounting cost? well if you’re one of the 60% of British businesses that struggle with cash flow problems, the prospect of invoice discounting is probably a very attractive one.

Rather than having to wait for 30-days, 90-days or perhaps even longer for clients and customers to pay their invoices, you can get the money straight away, which means you’ve got the cash to use as you please.

What is Invoice Discounting?

Invoice discounting is a type of invoice finance facility, this type of funding allows business owners to leverage the value of their sales ledger. Once an invoice has been raised and issued to your customer, a proportion of the total amount will be sold to the lender, providing an invaluable source of working capital throughout the month.

This type of finance is very similar to invoice factoring, the main difference here being that your customer may not be aware that you are using a cash flow facility. The role of sales ledger collections staying in house with you, so you carrying on collecting payments as normal and sending out reminders. This type of finance allows you to maintain your own style of communication and standards of customer service, on which the success of your company relies.

Invoice Discounting Definition

The definition of invoice discounting is it is a type of finance facility that allows businesses that deal with other businesses on trading terms to access instant cash that’s been tied up in unpaid invoices and tap into the value of their sales ledger. It’s simple: when you invoice a customer or client, you receive a percentage of the total from the lender, providing your business with a cash flow boost.

How does Invoice Discounting Work?

Invoice discounting works by, once you have made a sale to your customer, you send out invoices as work is completed or orders fulfilled. The pre-agreed amount of about 80-95% of each invoice is deposited to your bank account once a copy of the invoice has been received by the lender. Business that make use of this type of facility fill the gap of waiting for unpaid invoice to be paid, no more waiting of up to 90-days between raising a customer invoice and being paid. By releasing that cash quickly, you can manage the day-to-day activities of your business and plan for growth with a sustainable cash flow that builds working capital.

Sending out invoices immediately after work has completed is key to success with invoice discounting, as it allows for a regular influx of cash throughout the month. Once the agreed percentage of each invoice has been paid – generally around 80% to 95% of the total – you collect payment from your customer as normal.

Fees and charges are deducted from the remaining balance, and remitted to or claimed by the lender. Charges should be transparent and the fee structure made clear by the financier, however, along with all other invoice discount terms. This helps you to budget effectively, and make the best use of each cash input.

What are the Costs of Invoice Discounting?

It’s firstly important to note that not all invoice discounting providers are the same, and not all products and agreements are the same either. That means that this article won’t be able to tell you exactly how much or what are the fees and costs of invoice discounting for your business and situation, but we can give a good idea.

For many businesses that are struggling with cash flow, the prospect of invoice discounting is a very attractive one. Rather than having to wait for 30-90-days or perhaps even 120 days for clients and customers to pay their invoices, you can get the money straight away, which means you’ve got the cash to use as you please.

Whether you’re having difficulties making ends meet or you want the freedom to expand quickly, invoice discounting can be very effective. Of course, as with all forms of lending and other financial products, there is a cost associated with the service, which may mean that some companies are put off setting up an invoice finance account with a lender.

The fees your are likely to pay for an invoice discounting arrangement tend to change from one lender to the next and are often negotiable. As fees can differ quite significantly, with specialists in a particular industry often the most competitive, it’s essential you contact several providers for a quote.

The follow terms are likely to see included in the quote are:

  • Discount charge
  • Credit management (service) fee
  • Additional costs for services such as credit protection
  • Notice period to end the service – some providers have notice periods of up to a year which could be costly for your business

Discount charges

Discount charges work in exactly the same way as bank interest.

Typical charges range from 1.5 per cent over base rate to 3 per cent over base rate. The discount charge is calculated on a daily basis and usually applied monthly.

Credit management fees

There will be a fee for credit management and administration. The amount will depend on your turnover, the volume of your invoices and the number of customers you have.

Typical fees range from 0.75 per cent of turnover to 2.5 per cent of turnover.

For invoice discounting, fees are typically lower than for factoring because you will still collect and manage debts yourself. They generally range from 0.2 per cent to 0.5 per cent of turnover. These fees are less because the level of service provided is significantly lower than with factoring.

Credit protection charges

These will be levied in non-recourse factoring arrangements, where the factor is liable for any bad debts. The amount will largely depend on the factor’s assessment of the level of risk.

Typical charges range from 0.5 per cent of turnover to 2 per cent of turnover.

Invoice discounting costs: How much am I likely to pay?

Generally speaking, there are two main costs associated with invoice discounting, and they’re fairly straightforward. The first cost that you’re likely to come across is the service fee, which is the cost of having the facility in the first place. Usually, it’s calculated as a percentage of your turnover, and the percentage is likely to change depending on the turnover too, so there can be fairly significant differences in costs here.

This is the fee that’s most likely to vary between providers. It’s also often the case that fees for discounting will be lower than factoring, as there are fewer services being provided by the credit company. In most cases this fee is payable monthly and is agreed either in monthly periods or on a rolling agreement.

The other cost is the actual discount fee, which is the cost of the borrowing itself. For each invoice that you receive an advance for, you’ll be charged a small finance fee (similar to the interest on a loan) which is usually a few percent. This is quite simply to cover the time between you receiving the funds, and the finance provider receiving the funds from the cleared invoice.

Aside from these two main costs, there can also be additional ones that will vary from lender to lender. For instance, in some cases there might be charges to end the agreement early, because some are agreed over fixed terms. There might also be additional services added on to the package that have other costs associated with them too, and in some cases there might even be an arrangement fee. Always make sure you know exactly what you’re looking at when making comparisons, because hidden costs can quickly add up. Try to use some example finances to see how much respective companies would cost.

Example of Costs and Fees:

£1,000,000 Sales Turnover Per Annum – Confidential Invoice Discounting

  • Administration Charge – 0.6% of turnover = £6,000 + VAT per annum
  • Discount Charge – 2.5% over bank base rate – £4,604 + VAT per annum
  • Equivalent to £6.24 + VAT per month, per £1,000 borrowed

Invoice discounting rates: Are they right for my business?

Deciding whether rates are right for you will mean making a business case for the invoice discounting facility. Find out how much benefit your business will receive by having invoices paid instantly, and then balance this up against the costs that you’ve been given when comparing and getting quotes from providers.

  • Flexibility – your funding line increases at the same rate as your turnover meaning that you don’t need to renegotiate terms
  • Confidentiality – with this facility, we keep our involvement confidential from your customers
  • Bargaining Power – invoice factoring can help you to negotiate better terms with your suppliers
  • Faster Growth – grow your business at a much faster rate due to the flexible funding line

Compare Leading Invoice Discounting Providers

The other cost is the actual discount fee, which is the cost of the borrowing itself. For each invoice that you receive an advance for, you’ll be charged a small finance fee (similar to the interest on a loan) which is usually a few percent. This is quite simply to cover the time between you receiving the funds, and the finance provider receiving the funds from the cleared invoice.

Aside from these two main costs, there can also be additional ones that will vary from lender to lender. For instance, in some cases there might be charges to end the agreement early, because some are agreed over fixed terms.

There might also be additional services added on to the package that have other costs associated with them too, and in some cases there might even be an arrangement fee. Always make sure you know exactly what you’re looking at when making comparisons, because hidden costs can quickly add up. Try to use some example finances to see how much respective companies would cost.

Invoice funding can help with cashflow within your company, it helps realise outstanding funds within 24 hours. This allows you to pay your creditors on time.

Weighing Up the Costs of Invoice Discounting

When it comes to deciding if the costs are worth it in the first place, businesses will need to get a rough idea of how much the financing of each invoice is going to be worth to them. In a great many cases, the cost of the facility is negligible compared to the potential costs of having poor cash flow, which is why invoice discounting is now used by thousands of UK businesses.

Good cash flow can increase profits, and prevent the use of more expensive types of credit. It’s essential however to sit down and understand exactly how much the costs will be and whether they’re right for your business. This may mean that it’s worth consulting outside advisers.

Invoice Funding are one if the UK’s leading Invoice Discounting Brokers. We can ensure you get the best deal available on the market. Complete the online enquiry and we’ll  call back to you for further information

F.A.Q’s

What is the cost of an Invoice Discounting facility?

It is the fee the invoice discounting company charge you, usually on a monthly basis, for releasing the cash to you. These discounting charges are worked out on a percentage basis of the invoice value, typically ranging between 0.5 – 5%.

Invoice Discounting Facility Cost Example

Small Business - £250,000 Sales Turnover Per Annum. Invoice Discounting (finance released £35,417) Administration Charge - 1.7% of turnover = £4,250 + VAT per annum Discount Charge - 2.5% over bank base rate - £1,151 + VAT per annum Equivalent to £12.71 + VAT per month, per £1,000 borrowed

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